Indiana mulls second bite at property tax reform apple
Bloomberg News
Indiana lawmakers are considering two more far-reaching property tax reforms before Senate Enrolled Act 1 has even been fully phased in.
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That law, which was passed last year and which
But the law’s lead sponsor, state Sen. Travis Holdman, R-Markle, lost his primary election to a Trump administration-backed challenger after he helped vote down a redistricting bill in the state legislature, per the
Gov. Mike Braun called for further property tax reform on May 27, advocating the elimination of the property tax for seniors 65 and older and for anyone who has paid off their mortgage.
“Hoosiers need more relief,” Braun
A spokesman for Braun did not respond to requests for comment.
“If you’re exempting seniors from property taxes, it means that as long as you’re keeping property taxes at that same rate, you’re increasing the property taxes on younger homeowners and commercial, retail, industrial property tax owners,” said Ashlee Gabrysch, senior director and mid-central region manager for local government ratings at Fitch Ratings.
“There’s not necessarily initially a credit impact as long as those other parties are paying the property taxes that would have been paid by seniors,” she continued. “Longer term, you might see patterns of outward immigration.”
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That means the state is now heavily reliant on young families moving into the state, including from abroad, to offset its aging population.
“You could have a lot of senior communities that basically pop up by virtue of this (property tax reform), and people sort of voting with their feet to move to other states,” Gabrysch said.
Accelerate Indiana Municipalities CEO Matt Greller said the governor’s proposal “got a lot of pushback from not only those that use property taxes, local governments, but also legislators.” He said it represents a major shift of the tax burden from older to younger residents, and exacerbates the challenges facing younger would-be homebuyers.
“Just from an equity standpoint, older folks use the services provided by local governments probably more than any other segment of the population, and oftentimes they have the most ability to pay,” he said.
“We’ve always been a broad-based, low-rate state, and that kind of change would dramatically alter how we look,” he added.
“The idea that I’ve paid off my mortgage, therefore I shouldn’t have to pay for local government services anymore… there’s a disconnect there,” said David Bottorff, executive director of the Association of Indiana Counties. “They’re really not related. Your mortgage is your payment on your property that you own, and you’re still going to continue to get services.”
Bottorff said his association supports the concept of broad-based, low rate taxation, “but we often see the General Assembly giving deductions or credits to some property owners, which, depending on how they’re designed, really just increases the rate that everybody else has to pay,” he said.
Indiana’s 290 public school districts were already hurting from the impact of not only Senate Enrolled Act 1, but an earlier property tax reform championed by former Gov. Mitch Daniels in 2008, said Terry Spradlin, executive director of the Indiana School Boards Association.
The 2008 reform “implemented a system of tax caps and circuit breaker credits for property taxpayers, but losses for local units of government,” Spradlin said. “That reform of 2008 has had an impact collectively, year-to-date, of $4.2 billion for school districts in Indiana.”
He estimated that Senate Enrolled Act 1, which has a three-year phase-in, will have an impact of $770 million.
“Certainly, we’ve been tightening our belts, as school districts and school leaders across the state, to respond to less revenues available,” Spradlin said.
It’s not just school districts. “Police and fire have been hit substantially,” he added. “Cities, towns and counties have also been hit; but they’ve been given replacement revenue options through the (local income tax) option that they will be able to assess beginning in 2028.”
Police, fire districts, libraries and school districts were not given those tools, Spradlin said. He acknowledged the governor’s claim that the average Hoosier homeowner didn’t see much relief from Senate Enrolled Act 1, but said that law’s “real winners were the business sector… and farmers.”
The governor’s plan “would be a loss off the top of what is generated annually, and without any concept or mention of any replacement revenue,” he said.
“We get what we pay for,” Spradlin added. “So while we want tax relief as homeowners… I get it, but then at the same time, we have to have a system of taxation that provides those core services, those basic services that really do ensure quality of life.”
S&P Associate Director Savannah Gilmore said these types of property tax reform discussions “are picking up steam across the country.”
Ohio is considering a citizen-led ballot initiative to eliminate the property tax. And
“If any of these reforms pass, we will be paying very close attention to the impact on revenue collection,” said Anna Uboytseva, lead analyst and director at S&P. “We will be evaluating the projected scale of revenue reduction, availability, and the nature of backfill revenue sources to offset losses, and the mechanism for accessing those backfill sources. And of course, we’ll be very carefully keeping in mind the anticipated implementation timeline.”
The second Indiana property tax reform plan being discussed comes from state Rep. J.D. Prescott, R-Union City, whose office did not respond to requests for comment.
A Legislative Services Agency
“It remains to be seen how, say, school districts would be funded with this plan to totally get rid of property taxes,” Fitch’s Gabrysch said. “Furthermore, anytime you’re instituting a new tax, you’re never going to get the full brunt of those new tax revenues in its first year. It’s going to take a while to get up to nearly full compliance.”
Sales taxes are “very elastic and very sensitive to swings in the economy,” she added. “Property taxes, on the other hand, are much more inelastic, and it’s why we have bonds with this general obligation pledge. Property taxes are the keystone of the municipal market, and why muni bonds are so attractive.”
Indiana has historically had high rates of property tax collection, and therefore “very secure instruments” backed by property taxes in the state, Gabrysch said.
One benefit of property taxes, Bottorff noted, is they are generated locally and spent locally, “and then the local officials are accountable for that spending.” Prescott’s plan would eliminate that local accountability, he said.
And he wondered what the legislator’s plan is for paying off existing property-tax backed bonds.
“Those obligations are in writing,” he said. “They’re contracts, and you know nobody wants to see the government violate their contractual obligations… There are over $50 billion in existing property tax (backed) bonds that are out there,” including schools, cities and towns, he said.
“I don’t think he can eliminate property taxes immediately because of those obligations,” Bottorff said.
But Bottorff acknowledged that swapping out property taxes for sales taxes is not exactly a parallel replacement, and said he is concerned about impacts on local government bond ratings even with a more gradual, phased-in approach.
“Obviously, the bond buyers would react to that and look at the revenue sources that a local community has at their disposal, and judge the consistency of payments and the reliability of the payment methodology,” he said.
AIM’s Greller said Prescott has recently embarked on a statewide listening tour, and the one upside of his plan is that it contemplates replacement revenues, unlike the governor’s proposal.
“It remains to be seen whether a tax on services could even replace $10 billion in property tax revenue,” he said. “But there are many other questions that we have to address before you even get to that.”
For one, the outstanding debt: “I can’t imagine a scenario where we’re defaulting on bonds, credit ratings go in the toilet, interest rates balloon, and you’re talking about a pretty serious financial crisis if you go down that path,” Greller said.
Prescott has “acknowledged that in recent days and weeks, that there are debt obligations that would have to be addressed in some manner, but I’ve not seen how or where that would take place,” he added.
For another, local government bond ratings: “We’ve already seen some hits taken on the bond rating side, with what has already passed, at the city and town level,” Greller said. “I don’t believe that has yet impacted the state bond rating.”
The state also has one of the lowest per capita property taxes in the country, he said, while its sales tax rate is the second highest in the country, behind only California. And expanding the sales tax base has historically been taboo for Indiana policymakers, Greller said.
Under Prescott’s plan, school districts would receive 45% of the sales tax revenue generated, and the remaining funding would be distributed to counties, municipalities, townships, libraries and fire districts through a formula based on population and roadway miles, ISBA’s Spradlin said.
It “seems to be a very top-heavy system that we’re moving to, a state-dictated system of governance,” he said. “There are certainly a lot of questions, more questions than answers presently.” There will likely be more details available on proposed bills in December, he said.
In the meantime, Spradlin said about 40 school districts are moving forward with referendums in the November election allowing them to assess additional property taxes above their maximum levy to pay for operations. Many districts will struggle to maintain bus services to students if current trends persist, he said.
Additionally, about 16% of Indiana schools, or 46 school corporations, are now “high circuit breaker loss districts,” meaning their costs of transportation, utilities and insurance exceed the revenues in their operations funds, Spradlin said.
For now, the legislature has given those districts fund transfer flexibility, enabling them to transfer monies from the education fund and the debt service fund into the operations fund, he said.
“I don’t know that Prescott’s proposal will move,” Greller said. “I’m sure we’ll get a hearing and have some debate around it. I think there are other proposals that legislators are considering that have a stronger chance of moving along,” though none of those have yet advanced to the formal bill stage, he said.
“It’s a massive change, and it’s very likely to have unintended consequences that will have to be dealt with as they arise,” Gabrysch said. “And honestly, I think it remains to be seen whether this is actually going to give residents the sort of tax relief they’re looking for, or their legislators are looking for on their behalf.”
The state’s bonds are rated triple-A across the board.
