By Olivia Smith
Indiana Community Action Poverty Institute
March 6, 2026
This legislative session, our state policymakers have been using fancy terms like “tax conformity” to enact new state spending while flying under the radar during a hectic, non-budget session. Here’s what everyone in Indiana should know: SB 243, which was signed by the governor on Thursday, is a choice to spend $250M of state and local tax dollars on a very narrow type of tax relief that will not put money back in the pockets of most Hoosiers.
SB 243 is a 156-page, primarily technical bill that makes various tax-related changes to Indiana code, almost all of which are bland changes requested by the Indiana Department of Revenue, with one key exception added by the bill’s author: the creation of a one-year state income tax exemption on tips, overtime, and new car loan interest, similar to what passed at the federal level in 2025.
Supporters of this piece have said that this language does not “open the state’s budget” – something generally forbidden in a non-budget year like this one – because exempting tipped and overtime income from tax is simply “forgoing future revenue (read: income),” and that the cost of this tax expenditure could be paid for by tapping into Indiana’s growing state surplus.
The fact of the matter is that tax expenditures reduce state revenue, and as such, affect the budget. Let’s put it in kitchen table terms: if my hours at work are cut, or if my small business decides to charge less for products it sells, that’s also reducing future revenue and it absolutely affects my budget. I’m bringing in less money, which means I have less to spend moving forward.
Even more concerning from a fiscal perspective is the likelihood that this choice could result in a much bigger hit to revenue than the estimated $250 million. Here’s why: the IRS issued formal guidance in November 2025 that allows workers in additional sectors to be eligible for no tax on tips and overtime, including consulting, health, athletics, and the performing arts, and this guidance will remain in effect until final rules are adopted at the federal level, which has no deadline.
Tipped workers only make up about 2.5% of our workforce, but under this guidance, for every server who may see modest tax relief, there could be a high-earning consultant who can claim a $20,000 “tip” and see considerable tax relief. That same IRS guidance also gives taxpayers wide allowances in self-reporting their eligible income in determining their tax benefit—ironically, self-reporting is under attack by the General Assembly in Medicaid and SNAP eligibility.
The fiscal leaders of the Indiana General Assembly are determined to maintain that implementing a tax expenditure in the manner of SB 243 is not, in fact, a matter of opening the budget. While I disagree with that assessment, accepting that position forces an even larger question: why is this one-year federal tax conformity the only policy deemed worthy of tapping into our state reserves to fund in a non-budget year?
Why are lawmakers prioritizing this new tax expenditure while also refusing all session to consider using our state surplus to provide utility relief, summer meals for children, or improved health care services? Why have Hoosiers have been told that their utility bills, their children’s hunger, and their very health must wait until the budget year to be considered, while our legislators are willing and able to dip in to the state’s pocketbook right now?
Consistency and transparency are essential parts of the state’s budgeting process, and this move by the General Assembly to quietly and narrowly open the current budget in this non-budget session is a decision that Hoosier taxpayers should be made aware of so that they can demand better from their elected leaders.
Olivia Smith is a policy analyst for Indiana Community Action Poverty Institute. The Institute is a program of the Indiana Community Action Association. Indiana’s 22 Community Action Agencies provide over 70 programs & services that help Hoosiers throughout Indiana achieve and maintain financial well-being.
The views and opinions expressed are those of the author and do not necessarily reflect the views of The Indiana Citizen or any other affiliated organization.
