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The city of Carmel filed legal action this week against three state financial agencies over a law that diverts local income tax revenue from Carmel to Fishers.
According to the complaint filed Monday in Marion Superior Court 5, the city alleges the law harms Carmel by depriving it of tens of millions of dollars in local income tax revenue that it would otherwise receive.
The lawsuit says House Enrolled Act 1454, signed by Gov. Eric Holcomb on May 4, is unconstitutional and the three state agencies should be prohibited from enforcing it. The law went into effect July 1.
The lawsuit names the commissioners of the Indiana Department of Revenue, Indiana Department of Local Government Finance and Office of the Indiana State Auditor — now State Comptroller — as defendants.
The complaint says the defendants are named in the lawsuit because they have a role in carrying out the collection, allocation and distribution of local income taxes to civil taxing units.
A Carmel spokesperson declined to comment on the litigation, and a spokesperson for the Department of Local Government Finance said the department does comment on pending litigation. A Fishers spokesperson also said the city has no comment about the complaint.
Indianapolis Business Journal did not immediately receive responses from representatives of the Indiana Department of Revenue and the state comptroller.
House Bill 1113, passed by the Indiana Legislature in 2020, limited Carmel to a 2.5% increase in annual income tax growth for three years and diverted excess funds to Fishers.
The legislation’s goal was to account for a quirk in the way income taxes are distributed so the revenue more accurately reflects the cities’ increasingly similar populations and median household incomes.
The law was set to expire at the end of this year. However, legislators this year passed HEA 1454, which extended the law through 2026.
Local income tax revenue distributions are typically placed in a pot and distributed to local governments in accordance with a state-mandated formula, one that considers each community’s property tax levy and the amount of income taxes the city received the previous year.
Under the original legislation, the state capped the year-over-year growth of Carmel’s tax revenue allocation at 2.5% from 2021 through 2023.
The lawsuit says, before the law, Carmel historically received about 42% of income taxes collected and distributed to cities in Hamilton County while having 34% of the county’s population. Fishers received 23% of income taxes while having 32% of Hamilton County’s population.
The complaint says Carmel lost $16.7 million to Fishers after House Bill 1113 was enacted, rather than the estimated $10.2 million. It also estimates Carmel stands to lose more than $39 million through 2026 because of the extension.
The lawsuit claims HEA 1454 punishes Carmel for taking on the risk of building additional “costly infrastructure that others, including Fishers, chose to not invest in.”
It adds that Carmel invested millions of dollars in infrastructure by issuing bonds in reliance on the general local income tax allocation formula and attracted a greater amount of assessed value in the form of office buildings and corporate headquarters.
“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., as well as the staffing and facilities necessary to support robust police and fire patrols and emergency medical services,” the complaint says.
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