Indianapolis City-County Council leaders have agreed to increase visitor and entertainment taxes to avoid what one councilor called a drastic reduction in services.

Mayor Greg Ballard and Council President Maggie Lewis on Monday afternoon announced an agreement on the city's $1.1 billion budget that calls for raising local car-rental taxes by 13 percent and hiking the city's admissions tax by 66 percent.

After the increases, the total tax on a car rental would be 17 percent, and the tax on tickets to Colts and Pacers games would be 10 percent.

The proposed tax increases were introduced at Monday night’s council meeting and must be voted on by March 1.

The multifaceted budget deal averts a $32 million cut that was set to fall on Marion County agencies, which include the sheriff, courts, prosecutor and public defender.

“The city has two choices: either drastically reduce services or find other revenue sources,” said Council Majority Leader Vernon Brown, a Democrat who co-sponsored the tax-hike proposals with Minority Leader Michael McQuillen.

Brown said he had reservations about the tax hikes, but he agreed to them because they're levied primarily on people who come from outside the city and take part in voluntary activities. And he said it was the only way to restore funding to county agencies. Ballard vetoed $32 million in income tax revenue headed for county agencies in the council-approved budget, which spokesman Marc Lotter said left the city with a $35 million deficit and little savings.

The deal won’t mean the end of cost-cutting, though, as Ballard and Lewis said in a press release that they’re “committed to reducing 2013 operational spending by 5 percent.” Lotter said across-the-board reductions will leave the city with a much smaller gap, $6 million, and $42 million in reserves by the end of the year.

Ballard wanted to increase the visitor taxes because that revenue flows to the Capital Improvement Board, which oversees Lucas Oil Stadium, Bankers Life Fieldhouse and the Indiana Convention Center.

But under the deal, the first year's extra tax revenue, an estimated $6.7 million, would flow to Indianapolis' general fund. After that, 25 percent of the tax money—up to a maximum of $3 million—would go to the city’s coffers each year.

The CIB also will pay $5 million for public safety services this year. The agency had budgeted that money for repairs at the Capitol Commons Garage, and the city agreed to pay those bills out of its downtown tax-increment-finance district fund.

Brown said the deal also means the council's Democratic majority will drop its effort to levy a one-time, $15 million fee on the CIB. Council leaders saw the so-called payment-in-lieu-of-taxes proposal as a way to close this year’s budget gap and provide money for a police recruit class to replace retiring officers.

The mayor and CIB’s board of directors vehemently opposed the PILOT plan, and Brown called it a “looming legal battle no one has the will or finances to enter into.”

CIB President Ann Lathrop applauded the agreement, saying the board supported Ballard and Lewis' "hard work in crafting a budget that protects the fiscal health not only of the Capital Improvement Board, but all of city government."

The deal gives Ballard room to hire more police officers, but Lotter said there’s no police academy recruit class in the budget. The mayor may skip the academy process and hire trained officers from other departments, if more officers are deemed necessary, Lotter said.

The budget deal also could pave the way to a better working relationship between the Republican mayor and Democrat-led council.

They agreed to form a bipartisan commission to research whether to eliminate the homestead tax credit, an income-tax-funded subsidy for homeowners. (It is separate from the more-significant homestead tax deduction.)

The mayor and leaders from both caucuses will hold monthly financial meetings. They also will continue working to set up a “Public Safety Foundation” for 2013. The foundation, which has been under discussion for two years, would be a way for tax-exempt entities like Wishard Hospital or the CIB to make donations that offset the cost of public safety, which consumes the majority of general-fund revenue, Brown said.