LIT Reform Must Reflect the Full Intent of SEA 1

Tue, 10 Mar 2026 17:42:38 GMT

By Jamie Bolser, Director of Government Affairs, Association of Indiana Counties

The passage of SEA 1-2025 marked the most significant overhaul of Indiana’s property tax and local government finance system in a generation. It was not simply a property tax bill. It was a structural reform that included a fundamental redesign of the Local Income Tax (LIT).

As discussion continues regarding changes to LIT during the 2026 legislative session, we must ensure the discussion reflects the full legislative intent of SEA 1 and does not isolate income tax policy from the broader property tax framework.

What SEA 1 Intended

SEA 1 had four clear objectives regarding LIT:

Reduce overall local income tax authority – the law lowered the maximum combined LIT rate from 3.75% to 2.9%. This was part of a coordinated effort to reduce total local tax burdens – not shift them.
Overhaul the LIT structure – beginning in 2028, existing LIT rates expire and must be reestablished under a new framework. Counties may adopt a countywide rate. Municipalities with populations of at least 3,500 may adopt their own municipal rate. This was a reset, not a redistribution.
Increase transparency – local elected bodies must affirmatively adopt or re-adopt rates annually for increased accountability and transparency.
Integrate LIT reform with property tax relief – SEA 1 increased the homeowner’s deduction and provided a 10% up to $300 credit to rebalance a system in which homeowners’ share of property taxes had grown from 42% in 2012 to 51% in 2025. At the same time, lawmakers sought to remove perverse incentives that rewarded excessive growth in property and income taxes.

Why LIT Cannot Be Discussed in Isolation

Under Indiana’s system, certified LIT shares are tied to property tax levies. When a unit increases its levy, it increases its share of LIT distributions. The structure historically created an incentive to grow property tax levies to capture more income tax revenue.

SEA 1 sought to curb that incentive.

Counties have consistently demonstrated the slowest year-over-year levy growth among major units of government. The majority of county services – courts, jails, elections, and public health are constitutionally and statutorily mandated. Counties also provide services for veterans, community homes for the most vulnerable population, and county roads, bridges, and drainage services.

Recent proposals from Accelerate Indiana Municipalities would reduce county LIT rates while increasing municipal rate authority, lower the population threshold for municipal adoption, and allow municipalities to exclude the county fiscal body from county wide tax decisions.

Collectively, these changes would shift revenue away from countywide services that benefit 100% of taxpayers and disproportionately advantage higher tax-growth units. Roughly two-thirds of counties could be shortened by the county service rate, while the majority of municipalities would gain expanded authority.

This is not structural reform. It is reallocation.

Representation and Responsibility

All residents elect county councils countywide, including those living within municipalities. Allowing a municipality to capture income tax revenue from non-residents without meaningful involvement from the county fiscal body raises legitimate concerns about taxation without representation.

The General Assembly’s message in 2025 was clear: control growth, remove perverse incentives, and deliver meaningful relief.

Counties are already preparing budgets within the new SEA 1 framework. The solution cannot be to restore prior revenue streams, shift burdens among units, or create incentives that lawmakers intentionally removed.

If we are to honor the intent of SEA 1-2025, the 2026 LIT discussion cannot reward the very perverse incentives that were intentionally removed. It cannot shift burdens. It cannot recreate growth-driven formulas that prioritize levy expansion over equitable and balanced distribution and taxpayer relief.

Indiana’s communities are diverse. The solution must preserve local options determined by the county council: the fiscal body where all residents in every corner of the county elect the majority of its members.

Association of Indiana Counties News Newswire

LIT Reform Must Reflect the Full Intent of SEA 1