Property taxes in the tax reform spotlight

The chief budget architect for the Indiana House of Representatives outlined property tax concerns Wednesday for the next legislative session, with a focus on school referendums and the use of excess levy appeals.

Other topics included: remonstrance petitions, the maximum levy growth quotient formula and debt thresholds. Many were issues Rep. Jeff Thompson, the chair of the fiscal-minded Ways and Means Committee, attempted to address during the 2023 session but couldn’t come to an agreement with senators. 

“I’m working toward simplicity,” Thompson said after his presentation before the State and Local Tax Review Task Force. “(But) I don’t think we can solve it all in a single session. I’ve come to the conclusion that it is so massive that you’ve got to take … (a) series of steps.”

Warning on ag land

Thompson warned members of the panel that “we’re going to have a significant increase in the assessed value of farm ground.”

To determine the agricultural base rate for a given assessment year, the Department of Local Government Finance calculates a rolling average using six years of capitalized net operating income and net cash rent. The highest value of the six is dropped from the formula, and the remaining five years are averaged to determine a base rate.

For 2024, the base rate was determined to be $2,280 per acre, which is $380 per acre higher than for the 2023 assessment year.

An increase in assessed value doesn’t automatically mean an increase in a farmer’s property tax bill but it can.

Thompson said he estimates that base rate for agricultural land could soon jump to $3,100 because of the nature of the rolling average.

“And so we’re going to see a shift to farm ground. It’s on its way based upon the current formula. And so I just think it’s a policy issue. Do we want to allow that to happen or not to happen?” he asked.

Excess levy appeals and school funding

Thompson also examined the last three years of growth in excess levy appeals. Indiana communities can seek property tax levies beyond traditional caps when property values increase at a faster rate than the state average.

A boom in assessed values during the COVID-19 pandemic drove up maximum levy appeals as local government units sought to pay for schools, fire protection and more. But while the number of appeals didn’t change much between 2022 and 2023, Thompson noted that the amount approved nearly quadrupled. 

“… what these levy appeals really do, a lot of times, is just shift around who receives the money. The taxpayers don’t pay any more,” Thompson said. 

That’s partly because a large portion of payers, 90% in some areas, are already at their caps. But Thompson said he didn’t consider this growth to be one of the biggest areas of concern. 

Assessed value boom drives jump in maximum levy appeals

Instead, he pointed to rate-based school operating referenda that aren’t subject to maximum levy growth limitations nor curbed by circuit breaker limitations.

This means that when a homeowner’s assessed value increases, schools will see a funding bump unless they decrease their tax rates — and taxpayers will see their referendum property tax bills increase. 

“In most cases, that’s worked pretty well until we hit 2022 (taxes paid in) 2023 … we had a significant increase in the amount of the statewide levy,” Thompson said. “Part of it was tied to — not all of it, now — was the huge amount of increase in assessed value.”

Such referendums are approved by taxpayers, Thompson acknowledged, but homeowners don’t always anticipate double-digit jumps in assessed values that will drive up tax bills when voting to approve a referendum.

A 2023 bill authored by Thompson implemented a cap that limited increases to a “typical” 5-6%. Follow-up action in 2024 extended that for some but allowed more flexibility for growing school corporations.

But Thompson warned that if the cap wasn’t extended out to 2030, property owners were projected to see a 14.2% jump in 2025 taxes paid in 2026.

Rep. Greg Porter, an Indianapolis Democrat, wondered if some voters approved referenda on a more conceptual basis, rather than the line item, to prioritize better teacher wages and educational advancement in their communities. 

“I think people don’t necessarily try to sit back and calculate your assessed values — unless you’re trying to sell your home — but they’re just looking at the overall situation in regards to educational attainment or outcomes,” Porter said. “I understand what you’re saying but the argument on the other end is what the intent of that said voter (was).”

Thompson repeated his concern about a 15% increase for homeowners but said that, as a former teacher, even he understood that sometimes the standard 6% increase wasn’t enough for some schools.

Proposals for change

Cris Johnston, the director of the Office of Management and Budget, said he personally thought that maybe the referenda should be levy based instead of rate based.

“But the average taxpayer, I don’t think, understands property tax levies. So the rate is something they can understand a little bit better…” Johnston said. 

Adding so much more context to educate a voter on the complexity might make a ballot question about approving a referendum “pretty wordy,” Thompson said. 

Another problem, Thompson said, occurred when corporations resorted to bonding debt due to “poor governance,” which hurt taxpayers. 

But Indianapolis Democrat Sen. Fady Qaddoura said he saw issues as more systemic and the result of decades-long plans to divert public school funding to other areas, like charters or private school vouchers.

“I (can’t) help but think this is a very complex problem and I feel that we are dealing with the symptoms. All of this discussion today has been dealing with symptoms of the problem,” he said. 

Indeed, Qaddoura urged pulling away from property taxes as a source of local funding for schools. Property taxes from wealthier communities can generate more funding than those in low-income areas, for example. Indiana adopted a hybrid approach that combines state dollars with local property taxes to offset that disparity but some say it doesn’t do enough.

“I hope that there will be a day that there are no property taxes in the state of Indiana used to fund our schools and we can look at state-level funding,” he said.

Qaddoura said referendums were “a symptom of unfunded needs” for school corporations. 

The two-year task force is working overall to reform Indiana’s tax system with a particular focus on income, sales and property taxes.

Editor-in-Chief Niki Kelly contributed to this story.