SOUTH BEND — It's coming down to crunch time for South Bend city leaders, as they work to close a projected $10 million deficit in their 2009 budget. Now, talk is once again growing about one potential, but controversial solution: a boost in local option income taxes.

South Bend Mayor Steve Luecke unveiled a plan to implement a 0.5% local option income tax hike and a 0.25% public safety tax late last year. South Bend's Common Council then passed the measure 6-3.

Under Indiana law, all local option income tax (LOIT) increases must be approved by at least two of the county's three largest taxing bodies. In St. Joseph County, that's the South Bend Common Council, Mishawaka Common Council and St. Joseph County Council.

Just two days before the state imposed deadline of December 31, the St. Joseph County Council abruptly canceled a planned meeting to vote on the proposal.

With budget battles underway again, some say talk over the hotly debated tax hike may have new life.

No one has actually introduced a proposal to do that, and, so far, no one is admitting that they plan to.

One thing is certain: both the county and the city project their budget deficits to grow next year, and time is running out to find a solution.

The debate divided St. Joseph County late last year. Both city and county meetings on the proposed LOIT increase were packed with standing room only crowds, many sharply opposed to the idea of a tax hike.

It was a debate that resurfaced during two town hall budget meetings held by South Bend leaders last week.

During the forum, Mayor Luecke said he was "hopeful the city and county would have additional discussions" over a LOIT increase. Luecke has repeatedly said he believes the increase is necessary to avoid catastrophic cuts to core city services due to Indiana's new property tax caps implemented under HEA 1001.

That isn't preventing the city from starting to cut from this year's budget.

On May 11, city leaders cut $3.2 million from the city's general fund and $300,000 from the parks department budget by freezing most city salaries, cutting out nearly all capital expenditures, moving 12 employees to "cost sharing" positions, and eliminating nine positions.

City leaders have already crunched the numbers of what further cuts might have to be made, both with and without a LOIT increase.

South Bend faces a projected $8-$10 million loss in property tax revenue in 2009, and an $18-$20 million loss in 2010, said South Bend City Controller Catherine Fanello.

"If we passed a half percent, for example, it would generate about $6.2 million. A full percent would get us about $10.4 million. But with a half a percent of the regular income tax at $6.2 [million], and then if you added the 0.25% percent public safety tax. Another $5.2 [million], you're up to about $11.4 million," Fanello said.

"Either way, it wouldn't solve the total problem," she continued. "But the mayor's not looking to solve the total problem with income tax."

The bigger problem, however, may be timing.

Last year, some county councilmen said it was all wrong. A recession, they reckoned, was no time for a tax hike. Some say that feeling hasn't changed.

"From the county's budget standpoint, we've pretty well got things lined up, and I would like to stall it for a while," said Republican County Councilman Dennis Schafer. "I just don't think it's the right time."

Others argue, time is actually running out.

For any LOIT money to be included in 2010 budgets, the increase would have to be passed by July 31, 2009, just two months away.

St. Joseph County Council President Rafael Morton, a Democrat, says that means the LOIT issue isn't just a city problem as some have painted it to be.

"Going into next year, we are basically in a very similar situation," he said. "The state has put us in this position because of their tax shift. And the state views it as if we raise taxes, then that's our tool to deal with our shortfall. I really have a problem with labeling taxes as a tool."

Even so, when asked if a LOIT increase was no longer a question of "if" but "when," his reply was simple.

"I would say that's a fair statement," he said. "Unless something happens downstate to bring in other revenue streams, that's a fair statement. We just have to keep pushing for some type of additional revenue streams."

There may be one other "last resort," however.

Under HEA 1001, taxing units who expect to have a reduction in their property tax collections of at least 5% in a calendar year as a result of the Circuit Breaker caps on property tax bills can apply for emergency help from a newly appointed "Distressed Units Appeals Board" or DUAB.

That board has the power to temporarily raise the state's new property tax caps for that unit of government, delaying property tax relief to homeowners, while "phasing in" revenue cuts to local governments.

So far, the city of Gary and the Beech Grove Public Library in Knox County are the only taxing unit to make an appeal to DUAB.

Some feel South Bend should take a closer look at making its own appeal.

"We got some information from our council attorney on that last week, and all the council members will be looking at that to see if that is a possibility," said South Bend Common Council President Derek Dieter, a Democrat.

One thing does appear certain, however, Dieter said.

"You're probably at the tip of the diving board. You have to sink or swim. That's where we're at. And, if it's as bleak as it seems, which I think is inevitable, then the council will consider what we need to do. And that could include contacting one of the other government agencies," Dieter said.

However, when asked if the council had any immediate plans to seek either a DUAB appeal or a LOIT increase, Dieter didn't hesitate to respond.

"Not at this time, no," he said.

As for asking for the county's help to pass a LOIT? Support may depend on who's asked.

"I can't say if I'd support it [on the city's behalf], but 100% of my district is in the city of South Bend. Those are my constituents too, so the city's issues have a big impact there too," said Morton.

When asked if a plea from the city would influence his vote, Schafer had a different reply.

"Probably not," he said. "I almost drove off the road seeing gas at $2.65 today. I just don't think it's the right time."

If that remains the case, then both the city and county will likely face a familiar scenario all over again: cuts, potentially includes dozens, if not hundreds of layoffs.

"There's no way to avoid them with a $20 million loss in revenue," Fanello said. "There's just no way."