A flurry of property tax proposals geared toward reform following an uptick in prices closely mirrors trends from the last fifty years in which such increases bring systemic changes, according to new analysis from Larry DeBoer, a retired agricultural economics professor from Purdue University.
DeBoer’s analysis, which spans the last 50 years of the state’s property tax policy, detailed several points of — at times — reactive policies from Indiana’s elected leaders over recent decades followed by stagnant periods with little change.
“In a sense, an emergency happens and we react. But in another sense, if it ain’t broke, don’t fix it,” DeBoer said. “But when it does break, boy we try to fix it as fast as we can.”
The new research, published with the Indiana Fiscal Policy Institute, was unveiled at a joint event Monday with Prosperity Indiana in advance of the 2025 legislative session along with a second paper analyzing the impact of the COVID-19 pandemic on Indiana’s property tax.
DeBoer’s presentation was followed by Neva Butkus, with the Institute on Taxation and Economic Policy, and Chris Watts, with the Indiana Association of REALTORS.
Looking at gubernatorial tax proposals
The three-person panel also analyzed the property tax reform proposals from the three gubernatorial candidates: Republican Mike Braun, Democrat Jennifer McCormick and Libertarian Donald Rainwater.
Braun’s plan, the more “traditional” of the three, would increase the homestead deduction and freeze future tax increases while reforming referendum language. Butkus observed that the 60% homestead deduction applied to everyone, regardless of income or home value, and didn’t target the poorest homeowners who might need the most relief.
“When you increase deductions for one group, you shift taxes to other groups. And so raising deductions for homeowners would shift taxes to farmland owners and business owners,” DeBoer said.
However, DeBoer endorsed efforts to make referendum language simpler and easier to understand.
McCormick’s plan largely focuses on income tax relief to offset property tax increases — meaning local units of government wouldn’t bear as much of the brunt.
“I feel like a lot of them are … dancing around the idea of a circuit breaker,” Butkus said, using the national definition of a circuit breaker as opposed to the state definition.
Rainwater’s plan would freeze property tax rates at purchasing prices and end payments after seven years, a plan that would certainly “be jeopardizing” for both state and local government budgets. DeBoer noted it would be a “good deal” for a longtime homeowner who still depended on local government services like public safety, schools and roads but didn’t pay toward any of it. Butkus pointed to greater affordability disruptions in the housing market caused by locking people into their homes with favorable tax incentives.
A historical perspective on property taxes
DeBoer’s review retraced policies dating back to the 1950s, but started with the systemic restructuring under former Indiana Gov. Otis Bowen, who held the office between 1973 and 1981.
In 1971, property taxes hit 5% of a Hoosiers’ personal income, higher than the 2%+ Indiana homeowners have today and high enough to make the state’s system one of the most expensive in the country. In response, the state established property tax credits that steeply reduced the property tax burden but offset the budgetary hit by doubling the state’s sales tax from 2% to 4%.
“It was the first but not the last instance of Indiana moving state and local taxation from property to sales (taxes),” DeBoer observed. “… we’ve got a relatively high state sales tax in Indiana at 7%. Four of the seven points on that tax were originally intended for property (taxes).”
The next decade introduced homestead credits, the latter of which was expanded twice in the 1990s alongside an effort to tie assessed values with more current market prices. Previously, assessments were spaced out so far that a new assessment would cause a precarious jump in values.
Again, lawmakers increased the sales tax in 2003 and 2008 to offset tax losses after reforming the system and allowed local governments to tax incomes.
Ultimately, a 2010 constitutional amendment introduced tax caps — which cap property tax bills at a percentage of assessed value. The cap is 1% for homesteads; 2% for agriculture and 3% for businesses. But it allows assessed value to grow without constraint, which often leads to higher tax bills.
The latest shock to the state’s property tax system came during the economic turbulence of COVID-19 when Americans were buoyed by cash from the federal government and seeking bigger homes — all while homebuilding plummeted but interest rates stayed low. Though prices started increasing in 2021, taxpayers didn’t notice it in their bills until 2023, which were based off of 2022 assessments of 2021 market prices.
“Two years after real estate markets, it comes home to roost in property taxes,” DeBoer said.
The effective tax rate at this time actually went down, DeBoer explained, but not enough to offset skyrocketing gross assessed values, which are the starting point for calculating tax bills.
Homes saw their property taxes go up by 17.1% between 2022 and 2023, with another 6.6% hike between 2023 and 2024. The latter year saw gross assessed value for farmland jump by 26.5%, compared to 10.5% the year before, following a surge in pandemic-related demand for commodities. Now, however, that demand is drying up just as those higher tax bills are hitting farmer’s mailboxes and homeowner property taxes stabilize.
Farmland taxes are calculated based on several years of commodity pricing and aren’t likely to fall until 2029, DeBoer said.
And Watts warned that property prices wouldn’t be falling anytime soon.
“The biggest threat that we see in the market isn’t another spike in demand and the hyper-competitive climate like we saw in 2020 or 2021. It’s more of mortgage rates tapping into this pent-up demand (that’s) coming back and starting to chase a limited supply of homes,” Watts said.
Other discussion
Butkus, in her own presentation, pointed to the “disconnect” between property taxes and a homeowner’s ability to pay, calling for more action to protect Hoosiers living in areas with high value increases but little means for paying those new taxes.
She pointed to an analysis from her organization that calculated the total tax rate for families, finding that Hoosiers in the lowest bracket making less than $22,600 effectively pay 13.3% of their income toward taxes. In comparison, the top 1% of families making over $574,200 paid just 6.2% of their income toward taxes.
The report concluded that the lowest 20% of Hoosiers by income paid more than twice the rate of the wealthiest families when it came to property taxes as a percentage of their income, at 4% compared to 1.4%.
Assessment caps “artificially (held) down” property taxes along with homestead exemptions, keeping established families in their homes but locking younger families out of the market — which is currently happening to a more extreme extent in California, Butkus said.
“They’ve locked in their nice property tax bills and they aren’t moving. And because of that, there’s no movement in the market, and people aren’t able to buy homes and enter that market,” Butkus said. “So homestead exemptions and assessment caps … while they can lower property taxes for people, they’re not really hitting the mark in terms of making things affordable…”