One House lawmaker is calling for property tax reform after a hot housing market in 2021 and 2022 spurred an average statewide net increase of 21.2% for residential properties compared with last year’s bills.
“The property tax system is too clumsy, too rigid to deal with these changes,” Rep. Ed DeLaney, D-Indianapolis, said. “The system is just not flexible; we need to rely on taxes that are more flexible.”
Many Hoosier homeowners have already received their latest property tax bill—or will in the coming days—and discovered the jump, which ranges from zero change in one county to more than 20% in four counties around the state.
The latest analysis on property taxes comes from the Association of Indiana Counties, which partnered with Policy Analytics to produce a report earlier this year. Ryan Hoff, the organization’s director of government relations and general counsel, said multiple factors, including Indiana Supreme Court rulings, had crafted the market value and use system used today.
“It’s been 15-plus years since property tax caps went into place. Maybe it is time to evaluate where we stand and where we’re going,” Hoff said.
The stakes of property tax reform
DeLaney said the one-year property tax increase was equivalent to nearly four typical years and that next year would see another significant, though smaller, increase.
The bulk of the increase fell upon residential properties, signaling the volatility of the current property tax system and disproportionately benefiting township governments—the smallest and often attacked unit of government.
“It’s simply too complicated. I don’t think a complicated tax system is a good thing because the public can’t understand and the legislature, frankly, can’t always understand it,” DeLaney said.
DeLaney compared the state’s income tax system—set at a flat rate across tax brackets—with the property tax system that required annual assessments on individual properties while negotiating exemptions or credits.
Hoff noted that the state set the parameters for local units of government, including the times when they pass property tax exemptions or require counties to fund local court services.
“The system is handed to us by the state. All of the rules around assessments and budget controls, levy growth and so forth,” Hoff said. “Local units don’t have home rule authority relative to taxation.”
Just last week, speaking on a bill that would lower the guardrails around residential and housing TIFs, Hoff said that governments placed too much pressure on the revenue source. On the local level, property taxes also fund libraries, elections, county government operations and even public health.
“If you continue to look at the property tax base as being the way to fund multiple things, especially in the era of property tax caps, eventually you run out of room,” Hoff said. “(With) property tax administration, public health, you’re talking about a wide range of services that Hoosiers expect to be provided at the local government level. And the property tax base is becoming stretched to fund those services.”
Leaders have acknowledged that nothing can be done to alleviate the property tax burden for this year, though negotiations are ongoing for future solutions.
Rep. Jeff Thompson, R-Lizton, authored House Bill 1499, which passed the House on a 94-1 vote but hasn’t yet received a hearing in the Senate. As a temporary measure, the bill would have implemented a short-term property tax cap and increased state income tax deductions alongside limits on levies from local tax units.
In DeLaney’s own district, Indianapolis is granting a $100-150 credit on property tax bills using local COVID-19 recovery funds but Hoff wasn’t aware of other county plans.
Schools a focus of property tax reform
In 2007, Indiana opted to cap property taxes across the state, which had been a major revenue source for schools. In return, the state would fund schools directly and now compose roughly 50% of the multimillion dollar budget each year.
DeLaney argued that state funding for schools hadn’t kept up with inflation, something the December 2020 teacher compensation study also found. Increasingly, schools turned instead to referendums, or voluntary and temporary property tax increases to fund a specific project. But nearly a third of those have failed over the last 13 years, according to DeLaney.
“Our property tax system is not functioning the way it was intended to,” DeLaney said. “We need to change.”
Schools get roughly 42% of local property taxes. DeLaney proposed increasing state funding for schools and limiting the amount of property taxes they relied on, saying he thought they were “overly dependent” on homeowners when the Indiana Constitution obligates the state to fund the education system.
In turn, with less property tax funding going to schools, DeLaney said those dollars could be rededicated to provide local services: road funding, police salaries, libraries and more.
Though DeLaney said the Republican supermajority should have seen this property tax crisis coming, he praised Thompson for suggesting solutions, including a guaranteed $1,500 in property taxes to schools for each student with state funding filling any remaining gaps.
The current property tax system is not designed to benefit charter schools but the shift to state funding would actually benefit those schools, DeLaney—a frequent critic of charter schools–observed wryly. Charter school funding has been another hot topic during the 2023 legislative session.
The path forward for property tax reform
Both DeLaney and Hoff highlighted the proposed tax study commission authored by Sen. Travis Holdman, R-Markle. Initially proposed as a way to determine whether Indiana could eliminate its income tax, the group will also consider other taxes—maybe even tax revenues at the local level.
“We’ve got to look at how these systems work together,” DeLaney said about the tax commission. “Not just can we cut this tax, this tax and this tax but look at how they work together. This is an example: the property tax support for schools together with the state support for schools. The two things are twined together but I don’t think it’s working well.”
If the Senate bill advances to the governor’s desk, the commission’s report would be due before the next budget-writing session in 2025.