Property taxes are rising in Indiana, and three candidates vying to become the state’s next governor have now proposed very different strategies to reduce the tax burden on Indiana residents.

Republican U.S. Senator Mike Braun is pushing for higher property tax deductions for owner-occupied homes. Critics say the plan would cost local governments and school districts hundreds of millions of dollars in lost revenue.

Democrat Jennifer McCormick proposed tackling the problem through income tax deductions carried over from failed Republican legislative attempts, which would shift much of the nine-figure burden onto the state.

And libertarian Donald Rainwater wants to abolish the entire property tax system and replace it with a 7 percent tax on the sale of real estate – a move that could have even worse consequences for local governments.

Politicians of all stripes are sounding the alarm as property values ​​and related taxes have skyrocketed in recent years. Statewide, home taxes rose 9% in 2021, 9.2% in 2022 and 16.7% in 2023, according to a report from the Legislative Services Agency.

Indiana has been tinkering with its sales tax and various tax caps for half a century in an attempt to achieve property tax relief while funding local government—and schools in particular. Like the previous solutions, this latest set of solutions comes with difficult governance questions, namely who exactly should pay for police officers, firefighters, schools and more.

Braun’s plan

Braun’s proposal calls for:

• Properties with an assessed value of less than $125,000 receive the current standard deduction of $48,000 plus a 60% additional deduction.
• An additional 60% deduction for property valued over $125,000.
• A cap on annual property tax increases for homeowners at 3%, while reducing them to 2% for seniors, low-income Indiana residents (though his plan does not specify who qualifies as low-income), and families with children under 18.
• Demand that all tax referendums be proposed in the November general election.
• A general commitment to reduce property tax rates for settlers to 2021 levels.

“It shifts taxes to other taxpayers,” said Larry DeBoer, an emeritus economics professor at Purdue University who has studied local taxes for decades, of Braun’s plan. “I expect businesses, landowners and farmland owners will take a close look at this.”

However, Braun’s 3 percent cap on property tax increases and the general property tax caps set in the Indiana State Constitution – 2 percent of assessed value for farmland and rental property and 3 percent for businesses and other properties – would limit how much of the property tax burden can be passed on.

DeBoer said homeowners’ tax burden would definitely go down. He projected that the taxable value of a $200,000 home would drop to $98,000 under the current system, compared to $80,000 under Braun’s plan – a difference of about 18 percent.

According to the Legislative Services Agency report, homeowners paid about $2.9 billion in property taxes in 2021 and $3.6 billion in 2023. A return to 2021 tax rates would therefore result in a revenue shortfall of about $700 million.

Supporters of the schools, which receive about 43 cents of every property tax dollar for things like transportation and facilities, immediately opposed Braun’s plan.

“We see no way to move forward with the plan presented by Braun without negatively impacting school businesses,” said Scott Bowling, executive director of the Indiana Association of School Business Officials. State affairs.

Organizations representing cities and counties, which receive about 24 and 19 cents, respectively, of every dollar of property taxes, also expressed concerns.

Matthew Greller, CEO of Accelerate Indiana Municipalities, said State Affairs The property tax system accounts for between 45 and 65 percent of the general budget of cities and municipalities.

“Of their budgets, at least 70% typically goes to public safety,” Greller said. “So when you talk about property taxes, tax abatements, tax caps and the like, it has a direct impact on the services that cities and towns provide.”

McCormick’s proposal

McCormick demanded:

• Limiting annual property tax increases to 10% through refundable tax credits, except in the case of a school referendum.
• Increase the maximum property tax deduction for homeowners from $2,500 to $3,500.
• Increase state and local income tax exemptions from $1,000 to $2,500.
• Increase the renter income tax deduction from $3,000 to $4,000 per year.
• Higher deductions for seniors and disabled veterans.

McCormick said the state budget will cover most of the $600 million her plan would bring, but local governments will lose about $175 million.

“The real difference is whether you reform the property tax or whether you protect homeowners and taxpayers in general by limiting property tax increases or offsetting them with income tax cuts,” DeBoer said of McCormick’s plan.

McCormick’s plan would relieve some burdens on local governments, but would likely have faced opposition from the Republican-dominated Indiana General Assembly, which ultimately controls the state budget.

Lawmakers have their own plans to address property taxes. Republican House Speaker Todd Huston has already signaled initial support for Braun’s plan, saying: State Affairs it is “a great proposal as a starting point”.

Justin Ross, a professor of public finance and economics at Indiana University who also serves on the State and Local Taxation Commission’s working group, said McCormick’s plan is not as politically expedient as Braun’s proposal.

“People pay their property taxes and they’re upset,” Ross said. “And they forget that they got relief on line 400 of their income tax return.”

Rainwater’s Plan

Rainwater has proposed a seemingly much simpler solution: eliminate the property tax and replace it with a 7% tax on all real estate sales. If buyers couldn’t afford the full 7%, they could pay 1% per year for seven years instead.

After paying this sales tax, the homeowner owes nothing further for the property.

“That would be vulnerable to all sorts of manipulation that would make it really unworkable,” Ross said of Rainwater’s proposal. “I could do it like this: You buy my house for $1,000, but I leave my washer and dryer in it and you pay $199,000 for it.”

Ross said every sale must be accompanied by some kind of proof of value.

Rainwater’s plan appears to be the biggest drain on local property tax revenue of all. Moreover, it is based on irregular property sales rather than annual tax bills.

How will schools and local governments adapt?

A decline in property tax revenues would mean that homeowners would have to pay for it in other ways, such as a reduction in public safety services or local infrastructure, Ross said. Income and sales taxes could also increase.

DeBoer, the Purdue professor emeritus, pointed out that the state has raised sales taxes three times to replace property tax revenue.

“Four percent of the 7% sales tax was created for this reason,” DeBoer said.

In the 1970s, the state began to cover some of the cost of K-12 education by using the sales tax to fund it. K-12 education spending now accounts for half of the entire state budget. Teachers are paid this way—generally not through local property taxes.

To make up for the lost revenue, counties could raise their income taxes, DeBoer said, but schools and cities would not necessarily get a share of the revenue.

Governments could make budgetary savings, but in the end “there really have to be cuts,” he said.

“What does this mean for police and fire, road repairs and parks?” asked DeBoer. “If something happens on the revenue side, something has to happen on the spending side.”

Contact Rory Appleton at X at @roryehappleton or email him at (email protected).