The City of Carmel is suing three state financial agencies over a law that diverts income tax revenue from Carmel to Fishers.
The commissioners of the Indiana Department of Revenue and Department of Local Government Finance and the state auditor are listed as defendants in the lawsuit, filed July 24 in a Marion County court, because “they have a role in carrying out the collection, allocation, and distribution of local income taxes to civil taxing units,” the lawsuit states.
The state legislature approved the law in 2020, which limited Carmel to a 2.5 percent increase in annual income tax growth and diverted funds above that amount to the City of Fishers through 2023. Carmel officials in 2020 said they typically expected and planned for a 5 percent annual increase in income tax distributions.
The law was set to expire at the end of this year, but in May, the governor signed HEA 1454, which extended the tax diversion from Carmel to Fishers through 2026.
According to the lawsuit, Carmel estimates it will lose nearly $40 million in income tax revenue to Fishers during the extension period. The suit states that Carmel lost approximately $16.7 million to Fishers because of the 2020 law after the legislature estimated $10.2 million would be diverted.
The state’s LIT distribution formula was developed in the 1970s because the Indiana Dept. of Revenue did not have a way to track the city of residence for those paying income taxes. The state provides income taxes in a lump sum to each county, with counties distributing it to municipalities at a percentage equal to their percentage of tax levy within the county.
Before the change in law, Carmel received 42 percent of income taxes but only had 34 percent of the county’s population, while Fishers received 23 percent of the income tax but had 32 percent of the county’s population. The lawsuit states that, in other counties and elsewhere in Hamilton County, the percentage of income tax distributed to a municipality often doesn’t align with its percentage of the population. The suit states that Carmel is the only city in Indiana subject to an income tax growth cap that diverts funds to another municipality.
The lawsuit states that the rationale behind the state’s tax allocation formula is that “civil taxing units that make more investments in infrastructure will attract greater assessed value and therefore receive more funding from the local income tax allocation formula.”
“Carmel invested millions of dollars in infrastructure by issuing bonds in reliance on the general local income tax allocation formula, thereby attracting a greater amount of assessed value in the form of office buildings and corporate headquarters,” the lawsuit states. “Carmel likewise took risks that Fishers did not in building large commercial office parks, spending hundreds of millions of dollars in infrastructure for highways and streets, sidewalks, water and sanitary sewer infrastructure, storm water infrastructure, streetlights, etc.”
The plaintiff claims HEA 1454 “punishes Carmel for successfully taking on the risk of building additional costly infrastructure that others, including Fishers, chose not to invest in.”
Officials for the City of Carmel and DLGF declined to comment on pending litigation. A spokesperson for the City of Fishers also declined comment beyond stating the city does not have additional information on the matter. A spokesperson for the auditor’s office, also known as the comptroller’s office, stated the office had not received information on the lawsuit and declined to comment.
