Stephanie Wells: Reform could improve state’s tax competitiveness

Featured Issue:
In the 2026 legislative session, should lawmakers make any changes to the property tax law they passed this year that cut property taxes and has reduced revenue for cities, towns and counties?

The local government tax reform of 2025 impacted not just property taxes, but also local income taxes. Not all the changes in the reform took place right away.

Homeowners will see changes to how they are taxed on their property for each of the next six years. Changes to how we tax business personal property will begin in 2027. Changes to local income tax will take place in 2028.

This reform is putting constraints on local governments and schools and their ability to deliver services to Hoosiers, as it is lowering substantially the amount of revenue they can collect (even though rates are likely to increase). We, the Indiana Fiscal Policy Institute, will release data later this month from Larry DeBoer on how specifically this reform will impact Hoosier taxpayers and communities.

It is important to consider our tax burden relative to that of other states that compete with us for talent and investment. As we look to grow our economy, tax competitiveness is important, as tax burden does make an impact on the decisions of people and businesses to locate to a given state. (See our recent 2025 Indiana Competitiveness Index on the factors that determine competitiveness.)

For our competitiveness index, we looked to The Tax Foundation and its annual tax rankings. The foundation released its 2026 index at the end of last month, and Indiana maintained its overall 10th-place position nationally. (We’ve remained at or around this position for the last decade.)

Indiana was ranked as having the fourth-best property tax system in the nation in 2026. (We were fifth in 2025.) The report stated that ours is one of the “most efficient property tax systems in the nation, using levy limits to constrain the unlegislated growth of property taxes.” Some context: There is some interest in moving away from a levy-based system to an entirely rate-based system, which could impact our future competitiveness.

The report also noted that streamlining our local income tax system (which was part of the reform but doesn’t go into effect until 2028) would likely improve our overall ranking, more than any change in property tax policies. This mirrors information in a 2024 report, showing that Indiana has a lower reliance on property taxes than most other states, due to our dependence on local income tax revenue.

We must keep our relative tax burden (which is low) and the competitiveness of our tax system in perspective. It is important, but a low tax burden isn’t the only priority. As always, policymakers who wish to make adjustments to tax policy must balance the needs of Hoosier communities to continue to provide services that are desired by their residents, while also maintaining overall tax competitiveness.•

__________

Wells is president of the Indiana Fiscal Policy Institute. Send comments to [email protected].

Click here for more Forefront columns.