The Indiana Constitution of 1851 had a very broad idea of what should be taxed by the property tax. Basically: tax everything. It said the General Assembly must provide for the assessment and taxation of all property, both real and personal. Real property is land and buildings. Personal property could include equipment, vehicles, livestock and inventories for sale, but also intangibles, like stocks and bonds, and very personal property, like beds and kitchen stoves.
Assessing stocks and bonds was hard. Assessing household goods was intrusive. And automobiles often happened to be missing from the garage when the assessor stopped by. So in 1966, Indiana voters passed an amendment to the Indiana Constitution authorizing the General Assembly to exempt intangibles, household goods and automobiles from the property tax. Within a few years, they did.
It was the beginning of a trend.
In 1990 the legislature introduced homestead deductions. This was an amount to be subtracted from the taxable assessed value of a home, so tax rates applied to less than the full assessed value. This deduction grew to be quite large, and voters passed an amendment to the constitution in 2004 authorizing such deductions, just to stop anyone from challenging them.
That same amendment let the General Assembly exempt business inventories from the property tax, which it did by 2007. The big property tax reform in 2008 increased homeowner deductions again. That meant deductions on homes would eliminate a little more than half of the value of homes to be taxed.
Which brings us to the tax reform of 2025. The reform changes deductions and exemptions in a way that will reduce taxable assessed value — a lot.
There are three especially big changes.
· The deduction for homes will increase. The deductions we have now reduce the taxable assessed value of homes by about half. The new deductions will reduce it by two-thirds.
· A new deduction for rental housing and farmland will be introduced. This will reduce taxable assessed value of that property by one-third.
· More business equipment will be exempt from property taxes. A company’s equipment will be exempt if its total original cost is less than $2 million. The limit now is $80,000.
The changes will be phased in over the next few years, though 2031. As a first guess, these three changes may reduce taxable assessed value by 25 percent. This is the most significant reduction in taxable assessed value in the past 50 years, at least.
Of course, between now and 2031 the market values of property will rise. Home prices will increase, as will the values of business land and buildings. There will be new construction and more investment in equipment. The year-to-year changes in assessed value may still rise, but assessed value will be lower than it would have been.
If a new exemption reduced taxable sales by 25 percent, or a new deduction did the same to taxable income, sales and income tax revenue would drop by about those amounts. The property tax doesn’t work that way. With the property tax, each year local governments set their levies, which is the revenue they intend to collect, and divide them by taxable assessed value to get their tax rates. If assessed value drops, tax rates will rise to compensate. Again, as a guess, tax rates might rise by about 30 percent. An average rate of $2.40 per $100 assessed value might rise above $3.
Some rates won’t rise. Voters pass school referendums for operating costs at particular tax rates, which usually last for the length of the referendum. If assessed value goes down, so will revenue. Those school districts could see significant revenue losses.
The tax reform also puts stricter limits on levy increases. It introduces new tax credits, which are amounts subtracted from the tax bill, rather than assessed value. It eliminates other tax credits. It reforms the local income tax. It changes the formula for assessing farmland. It decreases the assessed value of newly acquired business equipment. And all these changes interact with one another, and with the constitutional circuit breaker caps.
It will take some work to untangle the effects of all these changes. But it all starts with the shrinking tax base.
