INDIANAPOLIS | A last-minute addition to property tax legislation approved late Sunday will force Lake County to impose a 1 percent income tax next year and dedicate all of the resulting proceeds to tax relief for homeowners.

The provision, which only applies to Lake County, was added as lawmakers worked to meet an 11 p.m. deadline to approve a new two-year state budget that provides $500 million in tax relief to homeowners this year and next.

"We're just trying to send a message that we need property tax relief," said Rep. Bob Kuzman, D-Crown Point. "Everybody keeps saying it, and we just put $550 million into it, and we need to see what the locals can do to help out, and this is a way to help out."

If Lake County doesn't approve the 1 percent income tax, which would raise about $76 million, county property tax levies would be frozen, forcing cities, schools and other taxing units to survive without a penny in new spending.

Sen. Luke Kenley, R-Noblesville, said negotiators from both parties agreed it was time to give Lake County a final shove to join Porter and 89 other counties that have some form of income tax.

"We're gonna try to push them to get them in the right position. I think they know that," Kenley said. "There will be political fallout. When you change your tax system, some people are going to be mad."

The income tax requirement is tied to legislation that spends $550 million in tax relief the state will raise by permitting thousands of slot machines at downstate horsetracks.

Several changes to Indiana's property tax system came to a head this year, prompting dire predictions of a 24 percent spike in tax bills homeowners will receive this summer and fall. Property owners will have to pay the exorbitant tabs in full, but the state will spend $300 million to send homeowners partial refund checks around the first of the year.

Counties will be required to mail notices giving legislators credit for the tax breaks, which lawmakers say should drop the average increase in homeowner tax bills to no more than 8 percent.

House Minority Leader Brian Bosma, R-Indianapolis, called the rebates a "harebrained idea" that "helps politicians and not the taxpayers." But, most of all, House Republicans complained it wasn't enough, demanding Democrats cut pet initiatives like full funding of free textbooks to poor children to squeeze out another $100 million in tax relief.

The demand was ignored. And Democrats who control the House spent the day persuading several recalcitrant colleagues to provide the 51 votes that were needed to pass the $26 billion state budget out of the chamber on a party-line vote. Crafted in unison with Senate Republican leadership, the two-year spending plan stays within anticipated revenue growth while providing 3.6 percent average annual funding increases to schools.

Beset by falling enrollment, Gary Community School Corp. is one of only nine Indiana school districts that will see a drop in state support, losing $11 million in tuition dollars by 2009. Rep. Vernon Smith, D-Gary, reluctantly provided the final vote needed to pass the budget.

"I voted for the bill because it's the best I could get," Smith said, fighting tears. "But what we did to Gary Community School Corp. is wrong."

The budget this year became inexorably linked to the property tax plan, which spends another $250 million in slots money in 2008 to ensure homeowners don't face more sticker shock in an election year.

Lawmakers abandoned efforts to shift school and child welfare costs to the state, but they stuck with provisions allowing local officials to freeze property taxes and move future spending growth to county-level income taxes. The legislation, House Bill 1478, also relaxes the circuit breaker for landlords and businesses, a move expected to dramatically reduce the budget shortfalls Lake County cities, schools and other governmental units were expected to face when the tax cap takes full effect in 2010.

On the final day of the session, lawmakers also approved a 44-cent cigarette tax hike to help fund health care for up to 374,000 Hoosiers. The plan was a top priority for Republican Gov. Mitch Daniels, and it raises the tax to 99.5 cents per pack.