Indiana homeowners are opening 2026 tax bills and — thanks to the $300 homestead credit, expanded supplemental deduction, and over-65 relief from SB 1 — many of those bills land lower than expected. That's the good news. The less-discussed part: the $1.3 billion in savings has to come from somewhere. SB 1 handed counties a new lever to pull: a replacement Local Income Tax (LIT).
Some counties have already pulled it. Others are debating it this budget season. The 2028 window opens LIT authority at the municipal level too, with a combined county + city cap of 2.9%. For planning-minded homeowners, the tradeoff is starting to get concrete.
What SB 1 actually did to local revenue
Three moving pieces landed together on the local-government side of SB 1:
- Levy freeze at 2025 levels. Counties, cities, townships, libraries, and schools can't raise the property tax levy above 2025 amounts in 2026. That's a hard constraint — any operating growth has to come from somewhere else.
- Replacement LIT authority from July 1, 2025. Every county fiscal body received new authority to impose up to 1.2% LIT to fund services that used to be paid through the frozen property levy. Some counties moved fast (boards of commissioners meeting in summer 2025), others haven't acted, and some have declined.
- Municipal LIT authority starting 2028. Cities and towns get their own LIT authority in 2028 — on top of the county authority — with a combined 2.9% county + municipal cap.
The net effect for anyone looking 2–5 years out: the Indiana revenue base is shifting from property-only toward a property + income hybrid.
Where counties have landed so far
We've been tracking county fiscal-body actions across Indiana. As of early 2026, three patterns:
- "Imposed immediately": A handful of counties (primarily large urban and heavy-industry counties with existing service demand) moved to impose at least a partial replacement LIT in the July–October 2025 window. Residents of those counties are seeing the new LIT rate on W-4 withholding starting January 2026.
- "Evaluating": Many counties held public hearings in Q4 2025, didn't act, and are re-opening the question as part of 2026 budget season. Expect decisions at April–June fiscal body meetings.
- "Declining to impose": Smaller, lower-service-demand counties (often rural agricultural) have declined. Their logic: levy freeze is manageable on existing revenue, and local politics are hostile to any income tax increase.
Your county's rate is on the DLGF Local Income Taxes reference page and changes year over year. Worth checking in March before you finalize household budgeting.
What the "net" looks like for a typical Indiana household
Run the numbers for a representative homeowner: $250K assessed value, $70K household income, Indiana standard homestead.
Property tax side (2026 vs. 2025):
| Component | 2025 | 2026 |
|---|---|---|
| Gross assessed value | $232,000 | $250,000 |
| Standard + supplemental deductions | −$87,000 | −$102,000 |
| Net AV after deductions | $145,000 | $148,000 |
| Tax at 1% cap | $1,450 | $1,480 |
| $300 homestead credit | — | −$300 |
| Net property tax | $1,450 | $1,180 |
| Savings vs. 2025 | $270 |
Income tax side (if county imposed 0.5% replacement LIT):
| Component | 2025 | 2026 |
|---|---|---|
| Household income | $70,000 | $70,000 |
| Existing LIT (say 1.5%) | $1,050 | $1,050 |
| Replacement LIT add | — | +$350 |
| Net LIT | $1,050 | $1,400 |
| Increase vs. 2025 | +$350 |
Net net for this household: $270 saved on property tax, $350 more on LIT → $80 worse.
That's not universal. Different income levels, different counties, different household types all produce different results.
Who wins and who loses
Wins:
- High-AV, low-income households — retirees with paid-off homes in growing neighborhoods. Big property-tax benefit, minimal LIT impact.
- Owner-occupied homesteads in counties that didn't impose replacement LIT. All upside, no offset.
- Small businesses — the SB 1 package also raised the business personal property exemption to $2M, so the paycheck side of "small business owners" is compensated.
Losses:
- Renters. You don't own the homestead, so the property-tax relief doesn't reach you directly (and landlords only partially pass savings through). But you do pay LIT on your paycheck if your county imposes. Pure exposure.
- High-income, low-AV households. High earners in modest homes (young professionals, two-income with small starter homes) get more LIT hit than homestead benefit.
- Non-residents who work in Indiana. Work in Marion County, live in Hendricks? You pay Marion's county LIT. Replacement LIT authority applies to all W-2 income sourced to the county, which catches commuters.
Mixed:
- Owner-occupied middle-income households. Depends entirely on whether your county imposed the replacement LIT and at what rate. Worth modeling yearly.
The 2028 municipal layer
In 2028, cities and towns within a county can add their own LIT up to a cap. The combined county-plus-municipal rate can't exceed 2.9%. Municipalities that lost revenue from the 2026 levy freeze but couldn't convince the county fiscal body to impose replacement LIT will have their own direct authority starting 2028.
What to watch:
- Which municipalities preview ordinances in 2026–2027. Budget debates will surface intentions well before 2028.
- Whether the combined cap constrains counties. A county already at 1.2% replacement LIT leaves only 1.7% of municipal headroom across all cities within it. In counties with several cities, they may collectively exceed that — forcing tradeoffs.
- How school referendums interact. SB 1 didn't change the referendum override mechanism. A municipality raising LIT for general fund while the school corporation passes a referendum for operating expenses can stack meaningfully.
What to do as a homeowner
Short term (this spring):
- Check your county LIT rate change. DLGF tables show year-over-year. If your withholding looks different on your first 2026 paycheck, it's probably the LIT.
- Use the new DLGF transparency portal to confirm your 2026 property tax bill reflects the $300 credit, expanded supplemental deduction, and any over-65 credit you qualify for.
- If your assessment itself looks off — the property-tax relief only works on a correct assessment. Our appeal process guide covers the evidentiary bar; our May 10 payment protection post covers the statutory payment shield available while your appeal is pending.
Medium term (2026–2028):
- Attend your county fiscal body meetings where replacement LIT is being debated. Public comment matters; decisions land on narrow votes.
- Track your home county and work county separately. LIT applies to wages sourced where you work; property tax applies where you own.
- Model the net impact for your household. SB 1 isn't uniformly good or bad — it's a redistribution. Which side you land on depends on your specific AV, income, and county.
Bottom line
SB 1 reduced property tax bills in 2026 for most Indiana homeowners, but it did so by giving counties authority to shift the revenue burden to local income taxes. The individual math depends on your county's decision and your household's AV-to-income ratio. Most owner-occupied middle-income homesteads come out slightly ahead; renters and non-resident workers largely don't benefit. The 2028 municipal LIT window makes the picture more fragmented, not less.
Watch what your county's fiscal body decides this budget cycle — that's the real signal for your 2027 and 2028 tax bills.