Indiana Property Tax Reform Is Coming, But In What Form?

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Committees in both houses of the Indiana legislature this week proposed major changes to the property tax reform legislation first reported in the Digest in early February. A Senate Committee left untouched the heart of the bill, which would pay for across-the-board property tax cuts with a sales tax rate increase, but made several serious changes at the margin that strip even the modest gains in tax fairness for low and middle income residents that the original bill had offered. Most importantly, the proposed increases in the state's EITC and renter deduction were pared back, eliminating the only two clearly progressive components of the entire proposal.

In contrast to the Senate plan, a new proposal passed by the House Ways and Means Committee departs fundamentally from the Governor's original plan. The plan endorsed by the House Committee limits homeowner property tax bills to a maximum of 1% of a household's income. Though income-based "circuit-breakers" such as this one are by far the most effective method for ensuring that nobody's property tax bill rises beyond their ability-to-pay it, the version endorsed in this instance has an unknown (but likely large) cost, and unlike every other circuit-breaker credit in existence, would be available even to the wealthiest homeowners. The best circuit-breakers exempt very low income individuals from property taxes entirely, and then limit everybody else's property taxes based on a graduated rate system that may range anywhere from 1% to 9% of income.

Given the constant concerns voiced by Indiana residents since at least July regarding their inability to afford their property tax bills, it is astounding that it took this long for a proposal that directly measures ability-to-pay in calculating property taxes to be given any notable attention. Though in this case the plan is unrealistic and unlikely to pass, adopting an income-based circuit-breaker is especially important in Indiana since its tax system would be made much less fair by the proposed sales tax hike.

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