Indiana legislators have been toying with a significant state tax overhaul for more than a year, even assigning a task force to review the options and present ideas for the 2025 session.
GOP leaders have an eye specifically on possibly eliminating the individual income tax. But Hoosiers want them to focus on property taxes, and property taxes are the most complicated of the tax structures to adjust.
Senate Republicans have begun releasing the results from their constituent surveys and property taxes are the clear favorite to cut. Twenty-seven surveys have been posted. Of those, 19 asked this question:
“Lawmakers are working on a long-term plan to improve Indiana’s tax system in the coming years. Which one of these taxes would you most like to see Indiana reduce/eliminate in the future?”
The choices were gas, income, property and sales taxes.
In 18 of those 19 surveys, property taxes were the clear leader. The last was a tie between property and income taxes.
For instance, 48% of Sen. Sue Glick’s (R-LaGrange) constituents said property taxes need to be addressed. Similarly, for Sen. Jeff Raatz (R-Richmond) at 41%. And again, and again.
Complicating factors
The problem is that property taxes are not an easy, clean cut.
Indiana has been running ahead of tax revenue projections for a few years now, amassing billions in reserves and even sending rebate checks to taxpayers for collecting too much.
Those collections are largely made up by individual income taxes, sales taxes and corporate taxes. And they would be the easiest to cut in terms of logistics. (That doesn’t include the discussion of how to replace at least some of the revenue to ensure state priorities are properly funded.)
But property taxes go to local units of government. They bring the firefighters to your house when there is a fire. They fix potholes. They transport your child to school. They pay for 4th of July parades and community events. They provide a library for your kids to read or those without Internet to apply for jobs. They plow the snow.
Cutting property taxes means either reducing local services or finding another way to fund them.
Years ago, the state paid property tax replacement credits to local governments to artificially reduce property tax bills. Those were eliminated when the state took over some large local levies and adopted property tax caps. Your property tax bill generally can’t go above 1% of your assessed value for homesteads, 2% for other residential properties and farmland, and 3% for commercial properties. I say “generally” because some referendums are on top of the caps.
I highly doubt legislators want to use state revenue to get back in the property tax replacement credit game. In 2007, before property tax reform, the state was shelling out $2 billion annually in these credits to local units of government. And it grew every year.
At a September meeting of the Interim State and Local Tax Review Task Force, former Sen. Luke Kenley told lawmakers they should pivot to focusing on property tax affordability, noting the 2008 reform he helped lead is starting to leak.
He reminded the group that property taxes, in contrast to income taxes, consider value but not necessarily owners’ ability to pay.
Limited options
Property tax expert Larry DeBoer, a Purdue University professor, said “It’s hard to do much without funding the lost revenue or radically reducing the size of local government.”
But lawmakers are at least thinking about how to help homeowners. Sen. Ryan Mishler (R-St. Joseph) – who chairs the Senate Appropriations Committee – heard an interesting bill this year that would exempt homesteads from paying property taxes, aside from those approved via a referendum. It was just an informational hearing but could be part of the 2025 discussion.
Senate Bill 285 would use $1 billion in state revenue that would be freed up after Indiana’s pensions are fully funded in 2032. The proposal, though, would leave local governments and schools in a lurch — with no replacement for the remaining $4.1 billion.
That would, of course, decimate services. But there could be a middle ground somewhere in the idea — maybe covering 30% of the homestead costs.
Homeowners especially are struggling with several straight years of increased assessed value and increased property tax bills. The biggest lift is reforming property taxes — but unfortunately for lawmakers, that’s what their constituents want.