Indiana’s three candidates for Governor have different views on how to approach the state’s property tax system, which has seen assessments rise in recent years and caused financial stress for residential, agricultural and business taxpayers.
Some of the candidates’ ideas include capping assessments at 2021 levels, looking at additional revenue streams through policies such as marijuana legalization, and not foreclosing on property owners who fail to pay taxes.
Currently, the Indiana General Assembly has a two-year task force working to reform the state’s tax system with a focus on income, sales and property taxes. In 2008, the state revamped its school funding formula by removing property taxes from funding schools’ general fund — which covers salaries and utilities — and raising the state sales tax by one penny. In 2010, the voters enshrined the property tax caps in the state constitution — 1% of the gross assessed value for homestead properties, 2% for rental and agricultural properties, and 3% for businesses. School districts that pass funding referendums are exempt from the property tax caps.
Republican candidate for governor and U.S. Senator Mike Braun has proposed a property tax proposal that overall is common practice but leaves people with more questions than answers, according to an Indiana University economics professor.
Braun’s proposed tax cap system — to reduce property taxes to 2021 levels — is the only “exotic” part of his four-point property tax plan, said Justin Ross, professor of public finance and economics at the O’Neill School for Public and Environmental Affairs at Indiana University.
“Indiana already has an unusual property tax cap system, and this would double down in that area. Everything else sounds pretty normal in the landscape of property taxation around the country,” Ross said. “A lot to figure out still in the nuts and bolts of what they mean, or how they would actually accomplish that kind of stuff. It’s likely harder than they might expect, but they’re not outlandish things by any means.”
In regards to the property tax cap, Braun proposes freezing future property tax increases by capping the increase in tax bills at 2% for seniors, low-income residents and families with children under the age of 18 and 3% for all other taxpayers. Any property tax increase exceeding the cap would have to be approved through referendum, according to the proposal.
The current property tax cap focuses on the type of property, like residential or commercial, Ross said, and focuses on the current property tax relative to the current market value. Under this system, as market values increase the cap increases, which means more money can be collected, he said.
Braun’s proposal focuses on the owner of the property rather than the type of property, Ross said. But, Ross said, more details would have to be figured out, like if the difference in the cap would be paid for through the state legislature’s budget or result in more uncollected revenue for local governments.
The property tax system also doesn’t know which taxpayers are seniors, low-income or have children under the age of 18, Ross said, which means that part of the proposal would have to be worked out further.
The referendum requirement for any proposed property tax exceeding the cap is also confusing, Ross said, since the cap on property tax bills only applies to a portion of the population and not everyone.
“The property tax caps in place make our system rather complicated. To add another level on top where it’s capped at these additional dimensions, that would be quite complex to work all that out,” Ross said.
Braun proposed overhauling the homestead deduction to allow every homeowner with an assessed value over $125,000 to deduct 60% of their home’s assessed value from their tax bill. Those with an assessed value below $125,000 would be allowed to take the standard deduction of $48,000 in addition to a 60% supplemental deduction, according to the proposal.
The proposal states the tax cut would result in a 21% reduction in the average homeowner tax bill and result in a 39% reduction in the average tax bill for homes worth $80,000.
Revising the deduction is “a fairly commonplace type of thing,” Ross said. Over time, the deductions lose their value due to inflation, he said.
The proposed homestead deduction would mean that a smaller fraction of the market value of a residential homestead would be taxed, Ross said. But, Ross said this could increase property taxes for other property types.
“If you are living in a house and owning it, you would get a reduction in your tax bill because more of it would not be taxable,” Ross said. “By the arithmetic of the property tax, other taxpayers would pay a larger amount. The governments set an amount to be collected and then divide it by your taxable value. So, if we shrink the taxable value on one group the rate automatically is going to adjust.”
Indiana is a fairly low property tax state, Ross said, especially for residential homestead owners. Indiana is a higher tax state for commercial and industrial properties, he said, so this proposal would continue that trend.
“It makes us lower tax in a place where we are already lower tax and higher tax in areas where we’re somewhat higher tax,” Ross said. “Local governments often negotiate deals with various commercial and industrial properties to give them lower taxes.”
Braun proposes an increase in local government transparency by establishing a property tax transparency portal to allow taxpayers to compare their current tax bill with potential changes under proposed tax rates.
To increase transparency, the proposal would provide a platform for taxpayer feedback and access to information about public budget hearings.
Ross said creating the portal “would be a quite significant undertaking on the administrative side.” Local governments already present their public budgets and offer a chance for feedback during public meetings, he said.
Finally, Braun’s proposal would require that all property tax-related referendums take place during high-turnout elections, like general elections in even years, and require a referendum to propose a total levy with data regarding the referendum’s impact on the median home’s property tax bill.
Ross said the proposed reform of the referendum process would align Indiana with common referendum practices throughout the country.
Overall, it’s hard to tell if the proposal would lead to significant cost savings for residents, Ross said. While on its face it seems the proposal would reduce property taxes for residential homesteads, it’s not clear if that would result in long-term savings, he said.
It would depend on how state and local officials respond to the proposal, Ross said, like if the state gave grants to local governments to make up for lost revenue or if the reduction in property taxes leads to an increase in sales tax.
“It leaves you in a question if you’re happy with that trade or not,” Ross said.
In Indiana, property taxes allow local governments to fund police, fire, parks, zoning, libraries and other services in the community. With less revenue coming from taxes, budget cuts would be required.
Democratic candidate for governor Jennifer McCormick’s budget plan states her administration would budget “based on priorities and the responsible use of public tax dollars.”
Her administration would also audit the possibility of merging state agencies to “support collaboration for efficient and effective spending and programming,” as well as scrutinize any tax increases proposed by the legislature.
In an interview this week with WIBC radio station in Indianapolis, McCormick said the statehouse is reviewing the property tax system and that she would focus on finding alternate revenue sources, like regulating marijuana.
Ross said it seems McCormick would look at tax changes in terms of their expenditure consequences.
“That’s what I take from her collection of statements: This is why it’s important to think about the expenditure side simultaneously with the revenue side,” Ross said.
Libertarian candidate for Governor Donald Rainwater proposes reforming property taxes to be 1% of the purchase price and a sunset of the property tax after 7 years of payment. As governor, he would also abolish Tax Increment Financing districts, which aim to spur economic development with a freeze on property taxes, according to his campaign website.
Rainwater would also set the property tax cap at 1% for residential, long-term care, and agricultural land, and 2% for commercial property. Rainwater would amend the state’s constitution to abolish asset forfeiture related to property taxes, according to his campaign website.
Rainwater’s property tax proposals as a whole “violate every principle of good tax policy that I can think of,” Ross said.
Making it unconstitutional to foreclose for failure to pay property taxes could result in little incentive for anyone to pay, Ross said. If property taxes were capped at the original purchase price, there would be a strong incentive for buyers and sellers to arrange sales in a way that minimizes the tax, he said.
“His ideas would result in a lot of tax avoidance shenanigans that would make the property tax both inefficient and inequitable across otherwise identical property owners,” Ross said. “There’d be endless ways of gaming the property tax with this collection of proposals.”
