Indiana: Costly and Poorly-Targeted Property Tax Caps will be on the Ballot this November

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The Indiana legislature gave final approval this week to a measure asking Indiana voters whether the property tax caps enacted less than two years ago should be enshrined in the state’s constitution.  Embedding these caps in the constitution is a radical step. They were only fully phased-in less than a month ago, so the full effect of these provisions has yet to be seen.  Moreover, despite the large amount of uncertainty surrounding the caps, available evidence already suggests that less well-off renters will be among those most hurt by the caps, while homeowners with highly-valued homes will receive enormous benefits.

The property tax cap amendment (which is already permanent law, regardless of whether voters decide to amend the state’s constitution) works by limiting property taxes to 1%, 2%, or 3% of assessed value, depending on the type of property in question.  Homeowners receive the benefit of the generous 1% cap, while rental units and farms will benefit from the less helpful 2% cap.  Other properties’ tax bills (e.g. businesses) will be capped at 3%.

A number of aspects of Indiana’s new tax cap regime are troublesome from a tax fairness perspective.  Since renters are generally less well-off than their home-owning neighbors, their higher cap is reason for concern. The 1% cap for homeowners is not helpful to owners of less expensive homes since they already benefit from a pair of large homestead deductions offered by the state. Instead, only those Hoosiers with very expensive homes (who may in fact be paying more than 1% of their property’s value in tax), are expected to benefit most from the caps

Finally, since some of the cost of these recent changes to the property tax was offset by a regressive sales tax increase, renters and lower-income homeowners can expect to pay more in taxes overall.

Inserting this problematic policy into the state’s constitution will only compound its shortcomings.  Specifically, as the head of the Indiana Association of Cities and Towns (IACT) put it: “This action will forever tie the hands of future General Assemblies to react to any unforeseen economic reality and put a level of specificity into our Constitution that is completely unprecedented.”

Nonetheless, politics made passage of the caps by the legislature almost inevitable.  As one Republican mayor in the state explained, "It's the same old political trick bag. It's typical that the 150 [state] legislators sit there and put a cap on property taxes and get to sit there and look good, when we're the ones taking all the heat, having to cut services."

At present, available polling indicates that the caps are popular among Indiana voters.  November is a long way away, however, leaving plenty of time for Indiana voters to become informed about the shortcomings of these caps.

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