Indiana’s legislative session is dominated by discussions on local tax reforms, particularly property and income taxes. While the state’s property tax system is nationally competitive, rising assessed values have sparked public discontent. Governor Mike Braun proposed significant reforms to curb property tax bill growth, leading to counter-proposals from the Senate and House. This article examines Indiana’s current local tax structure, analyzes the proposed reforms, and discusses the risks of shifting from property to local income taxes.
Indiana’s Current Local Tax Landscape
Indiana’s local governments rely primarily on property and local income taxes. In 2022, property taxes accounted for 83 percent of local revenue, while local income taxes made up 12 percent.
Indiana’s property tax system ranks fifth nationally for competitiveness, featuring caps on property tax rates (1 percent for homesteads, 2 percent for residential/agricultural, and 3 percent for commercial), generous homestead exemptions, and a maximum levy growth quotient (MLGQ), which limits annual property tax increases based on personal income growth.
Despite rising housing values nationwide (Indiana saw a 27.6 percent increase from 2014-2023), Indiana’s inflation-adjusted median property taxes increased by only 8.1 percent. Indiana has maintained the lowest effective property tax burden among its neighbors, with homeowners paying an average of 0.74 percent of their home’s value in 2023.
However, local income tax rates have risen, offsetting state income tax reductions. The varying local income tax rates, influenced by property tax relief components, raise concerns about increased state income tax burden, revenue volatility, and potential negative impacts on employment.
Three Reform Proposals
Governor Braun’s Original Plan
Governor Braun’s proposal included an enhanced homestead deduction and caps on property tax bill increases (2 percent for seniors, low-income, and families with children, 3 percent for others). While providing immediate relief, this plan could create significant revenue shortfalls for local governments.
Senate Amendments (Senate Bill 1)
The Senate’s version focuses on a stricter MLGQ (0-2 percent for 2026-2028), a local property tax deferral program, and a first-time homebuyer tax credit. This plan offers more moderate relief compared to the Governor’s proposal.
House Amendments (House Bill 1402)
The House bill proposes increasing the de minimis exemption for tangible personal property, fully exempting new business personal property, and transitioning to a flat supplemental homestead exemption. Critically, it restructures the local income tax system, allowing higher maximum rates for counties and cities. This could significantly increase Indiana’s overall income tax burden, potentially offsetting recent state income tax reductions.
Table: Indiana Income Tax Rates (Current vs. Proposed)
| Year | State Income Tax Rate | Average County Income Tax Rate | Maximum City Income Tax Rate | Combined Rate |
|---|---|---|---|---|
| 2022 | 3.23% | 1.65% | 0% | 4.88% |
| 2027 (Proposed) | 2.9% | 2.9% | 1.2% | 7% |
A Balanced Approach
Indiana policymakers should prioritize incremental reforms over drastic tax cuts, given the state’s competitive property tax system. Levy limits are preferable to assessment limits for controlling property tax bills. Modifying levy limits to ensure equitable distribution across property classes is advisable.
Shifting revenue from property taxes to local income taxes is not a growth-oriented strategy. Income taxes can distort economic decisions and potentially drive residents to other states or counties with lower tax burdens. Indiana should maintain low and consistent local income tax rates to preserve its competitive tax environment.