Carmel and Fishers are still feuding over income tax dollars after Carmel lawsuit win

Fishers estimates it will lose $10 million per year in future Hamilton County income tax dollars to Carmel after a judge ruled that the formula used to divide tax dollars between Carmel and Fishers is unconstitutional.

For years the two cities have been at odds over the state's local government funding formula — which benefits cities such as Carmel that have incentivized more multi-story structures but hurts Fishers. While both cities have almost identical population sizes, Carmel receives roughly $19 million more per year from the pool of county income taxes, according to the city of Fishers, because the income tax distribution formula is tied to how much money a city claims in property taxes, not in which city someone actually lives or works.

Marion Superior Court Judge John M.T. Chavis II sided with Carmel against the state in a court decision on Tuesday, ruling that the short-term solution lawmakers passed in 2020 and extended in 2023 is unconstitutional because it only negatively impacts one city. That compromise had capped Carmel's future income tax collection growth, diverting $16.7 million in new county income taxes between 2021 and 2023 to Fishers. A legislative analysis predicted Fishers would syphon away an additional $39.2 million by 2026.

More: Kroger grocery store, nearly 100 new homes proposed for 146th Street in Noblesville

Hoosiers pay income taxes by county not by city, which means it's impossible to tell how much income tax dollars come from each city's residents, or how fair the current funding formula is. Even with the cap in place, Fishers collected a much smaller portion of income taxes than Carmel.

Still, Carmel leaders argued that money should be rightfully theirs. Back in 2010, then Carmel Mayor Jim Brainard argued that the outcome of the funding formula likely lined up with the amount of income taxes actually generated by those living and working in Carmel due to the city of Carmel's investments. Income and property taxes are the two primary sources of income for cities, so lower income tax collections means fewer services for a city. So current Carmel officials welcomed the court's decision.

“If we had not prevailed it would have resulted in approximately $56 million of revenues moving from Carmel to Fishers, dollars that would have deprived our residents of critical infrastructure needed for our city," first-term Carmel Mayor Sue Finkam said in a statement. ”We strive to have cooperative relationships with neighboring cities. However, when special laws are passed that overstep legal bounds and harm our community, we will act."

Carmel filed its lawsuit in July last year against the Indiana Department of Revenue, the Department of Local Governmental Finance and the state auditor over the 2023 House Bill 1454, an extension of the provisions in 2020 House Bill 1113.

Chavis ruled that Carmel and Fishers are not unique enough to constitutionally justify a separate law which applies just to those two cities and no others in Indiana.

"This special law not only treats Carmel and Fishers differently than the rest of Indiana, it also treats them differently than each other," Chavis wrote. "That sort of special treatment is unconstitutional unless some characteristic unique to Carmel and Fishers justifies it."

Fishers supported both the 2020 and 2023 bills as a short-term fix, but leadership still felt short changed even with the cap on Carmel's collections' growth. Fishers Mayor Scott Fadness said this recent court decision harms his city even more.

Fadness has to provide services to his residents at a cost of $627 per person compared to Carmel's $1,120 per person, due to the difference in both income and property tax revenue collections, according to his numbers. As a result, he pointed out, Carmel employs 40 more police officers than Fishers does.

"This is going from bad to worse," Fadness said. "I certainly understand Mayor Finkam's desire to want to keep every dollar that they can, but one can't look at this formula and with a degree of common sense realize that some of those dollars that they're trying to keep are probably dollars that came out of Fishers residents' pockets."

He added that the discrepancy is "almost becoming impossible to overcome."

Fadness said Fishers leaders will continue to plead with lawmakers to amend the funding formula, but finding a solution both cities are satisfied with will be an uphill climb.

Contact IndyStar government and politics editor Kaitlin Lange at Kaitlin.Lange@indystar.com or follow her on X @Kaitlin_Lange.

This article originally appeared on Indianapolis Star: Carmel will get more tax dollars after winning lawsuit against state