Indiana voters elected Otis Bowen as Governor in 1972 on a pledge of “visible, lasting and substantial” property tax relief. The slogan appealed to voters because property taxes had been growing rapidly for two decades. Growth between 1951 and 1972 averaged 8.5 percent per year, raising the share of taxpayer incomes paid to the tax from 3 percent in 1951 to 5 percent in 1972. Indiana had the 11th highest property taxes as a percent of income in the United States. We were a high property tax state.
Today we rank 40th. The property tax as a percentage of income is 2.1 percent. Property owners are unhappy, though, because tax increases have averaged 8.6 percent for the past two years. The tax percent of income had been 1.9 percent in 2022.
Last year the General Assembly established a State and Local Tax Review Task Force (SALTR, pronounced “salter”), to study issues in Indiana taxation. This year SALTR will look at property tax policy. You can see the exhibits and watch the meetings on the General Assembly’s website.
Some history might be helpful. Indiana was a high property tax state in 1972. Over the next 50 years we became a low property tax state. What policies did we use to make that happen?
Otis Bowen’s property tax relief bill passed on April 13, 1973. The vote was tied in the Senate, so Lt. Governor Orr cast the deciding vote in favor.
The bill took three main approaches. First, it provided an immediate 20 percent credit for all property owners. The credit was funded by doubling the state sales tax from 2 percent to 4 percent. Second, it allowed counties to adopt a local income tax for further property tax relief. Third, it froze property tax levies or rates. Counties adopting the local income tax had their levies frozen and non-adopting counties had their rates frozen.
It worked. Property taxes as a percentage of income fell from 5 percent in 1972 to 2.5 percent in 1980. Indiana policy makers have used this 3-part approach for property tax relief ever since.
The legislature increased the sales tax rate to 5 percent in 1983 to make up revenue losses from the 1979-82 recession. In 2002, though, the rate rose to 6 percent to fund property tax relief for homeowners, who were about to see large increases in tax bills resulting from the court-ordered market value reassessment. In 2008 the sales tax rate was increased to 7 percent, to provide revenue to replace property taxes for the school general fund. All-told, 4 percentage points of our 7 percent sales tax originated to fund property tax relief.
In the 1980s two new local income taxes were created. These mostly provided added local revenue, but they reduced the need to tax property. New local income taxes authorized in 2007 did offer added property tax relief, and the LIT reform of 2017 made explicit the share of local income taxes devoted to property tax relief. As of 2024 the local income tax provides more than half a billion dollars in property tax credits, and for counties and cities LIT provides almost as much revenue as property taxes.
Counties with frozen rates would have received a big boost in revenues with the 1980 statewide reassessment of property, so the General Assembly reformed the tax controls in 1979. Levies were limited by a maximum levy. It could rise with average assessed value growth, with a minimum of 5 percent and a maximum of 10 percent.
During 1980s and 1990s, though, the share of property taxes in income crept upwards towards 3 percent. So, in 2002 maximum levy growth was linked directly to Indiana income growth. Controlled property taxes would remain stable as a share of income. Then, in 2010, we amended the state Constitution to create new caps on the percentage of assessed value that taxpayers could pay. Between 2007 and 2024 the share of income paid to property taxes dropped from 3 percent to 2.1 percent.
What will the SALTR task force recommend? We don’t know, but it’s a good guess that some of the policies they consider will be in the tradition of Otis Bowen’s 1973 reform.
