Experts warn that Indiana’s cities, towns and counties could take a hit to their credit rating through no fault of their own, but rather due to continued fallout from the state’s effort to curb property tax growth.
S&P Global Ratings, which provides independent credit ratings and research, warned that the new law enacted earlier this year “creates uncertainty” for local income tax-backed debt, according to a recent story in industry publication The Bond Buyer.
“At this point, we believe it’s too soon to assess how these changes will influence our ratings,” S&P Associate Director John Sauter told The Bond Buyer.
But a report co-authored by Sauter flags concerns with new provisions of the wide-ranging bill, which limited local tax growth and has left some municipalities scrambling to continue providing government services.
Rep. Ed DeLaney, an Indianapolis Democrat, said the news confirmed his concern that Senate Enrolled Act 1 “was not well thought out.”
“There is good reason for local governments to be concerned about their fiscal situation and for our citizens to be concerned about both local services and a threatened increase to local income taxes,” DeLaney told the Indiana Capital Chronicle. “As often happens, the super-majority was so focused on sending a message about property taxes that it pretty much forgot every other consideration, including the question of what the total implication is for our voters. It seems that total taxes will increase for many.”
He said that revisiting the property tax law would be a “useful topic” for a special session, “unlike eliminating Democratic representation in our congressional delegation.” Republicans are currently weighing a November special session to redraw boundary lines for congressional districts at President Donald Trump’s behest.
Provisions under Senate Enrolled Act 1
Senate Bill 1 went through several versions before landing on a compromise that would save homeowners a collective $1.2 billion in property taxes over three calendar years — money that would come out of the pockets of local units of government, including libraries and schools.
And while S&P previously worried about smaller tax bases and falling revenues, both of which would impact a locality’s final rating, experts flagged concerns about another provision.
In an effort to grant counties and cities a reprieve, state lawmakers opted to revisit local income taxes. Previously, such levies were an option only available to counties and capped at 3.75%. The new law lowers the cap to 2.9% but allows municipalities to impose their own rate up to 1.2% within that tax.
However, those taxes must be recertified annually, which S&P says creates uncertainty for debt tied to those taxes. Much like how people use their credit rating to borrow against their future income, local units of government rely on these bonds to finance capital projects and operations.
Due to the changes under the law, these municipalities could see their ratings take a hit. But the top credit rating agency said it wouldn’t take any action until 2028 when those requirements start.
That gives state lawmakers some time to act.
At a tax panel earlier this month, top Republicans confirmed that a follow-up bill to the law would be their first fiscal priority going into the next session.
“Chairman (Jeff) Thompson and I have had a number of conversations even before session was over earlier this year (about) changes we would need to make,” said Sen. Travis Holdman, R-Markle.
Moving out some effective dates for implementing changes, for example, would “give us time to start to process some of the changes,” said Holdman, who authored the first version of the bill.
He said the results have been all over the board.
“We’ve had some financial advisors who lit the hair on fire of some local mayors and county commissioners and county council members with some bad information to be honest with you, and so we’re just trying to get a handle on (that),’ Holdman continued.
Thompson, chairman of the House Ways and Means Committee, also acknowledged “modifications” to Senate Enrolled Act 1 are a priority for 2026.
Indiana Capital Chronicle is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Indiana Capital Chronicle maintains editorial independence. Contact Editor Niki Kelly for questions: info@indianacapitalchronicle.com.
