The governor signed Senate Bill 1 into law on April 15, 2025. This is the bill that was introduced with the governor’s big tax cuts for homeowners, which would have caused large revenue losses for local governments. The Senate amended the bill to make the cuts much smaller and spread them to all taxpayers, with much smaller local revenue losses. Then the House amended the Senate bill with a one of its own, with bigger tax cuts than the Senate version, but not as much as the governor wanted, and local revenue losses somewhere in the middle. That’s the bill that became law.
The property tax impact of this bill has been talked about a lot. But the bill also makes big changes in the second most important local tax — the local income tax, or LIT.
In 2025, local income taxes are levied in all 92 counties. They are collected with the state income tax and tack an extra 0.5 to 3 percent onto the 3 percent state rate. This year they’ll raise about $4 billion in total, mostly for cities and counties.
SB 1 makes three big changes to LIT. It eliminates the distribution of countywide taxes to most cities. It eliminates the LIT for property tax relief. And it will require counties and cities to re-authorize the LIT rates every year.
Almost all LIT revenue is collected on a countywide basis and distributed among local governments by formula. This has always made people uneasy. County councils take the heat for adopting a new tax, and then a large chunk of the revenue is distributed to cities. Or, in some counties an “LIT council” would make the decision to adopt the tax. The LIT council is a combination of the county, city and town councils, with votes distributed based on population. If a big city has the majority of people in the county, the city council could adopt a LIT tax for the whole county. Folks outside the city would pay the tax but never have a chance to “vote the bums out.”
SB 1 eliminates the distribution of countywide revenue to cities and abolishes the LIT councils. Cities or towns with populations of 3,500 or more will have to adopt a municipal LIT, taxing just the income earners within their boundaries. Counties can adopt a tax rate for the income earners in the whole county. This means that the tax decisions of elected officials are more closely aligned with the voters they serve. Counties can still decide to raise some LIT revenue for townships, libraries, special districts or smaller towns.
One of the uses of LIT revenue is property tax relief. Counties can adopt a LIT rate that raises money to fund property tax relief for homeowners, farmland owners, landlords or businesses. This reduces property tax bills, and the lost revenue for local governments is replaced with LIT revenue. Fifty-eight counties have a LIT tax for property tax relief, and it reduced property taxes by more than half a billion dollars this year.
SB 1 eliminates the LIT for property tax relief as of 2028. In those 58 counties, this will reduce LIT taxes but increase property taxes. It’s also the reason why the fiscal note shows a strange result. The fiscal note is the Legislative Services Agency’s analysis of the tax and revenue effects of the bill. It shows tax cuts for 2028 at $22 million, and local revenue losses of $686 million. Why the difference? Because the analysis includes the elimination of LIT relief revenue. If local governments readopt these LIT rates, their revenue losses will be smaller.
It's always been the case that LIT rates, once adopted, remain in place unless the county council votes to change them. In 2031, SB 1 requires LIT rates to be readopted each year. This means that county and city councils will face the tax adoption heat year after year. Tax rates dedicated to repaying bond borrowing will remain. Note that state legislators imposed this annual readoption requirement for local income taxes but did not impose it on themselves for the state income tax.
SB 1 is 344 pages long. It’s going to take a while to fully understand everything it does.
