Two-year tax task force releases property, income and business recommendations

A two-year task force on Wednesday released broad suggestions for property and income tax changes, but left the specifics to business tax recommendations.

Lawmakers created the State and Local Tax Review Task Force last year in hopes of ditching the state’s individual income tax. That’s now off the table.

“In 35 or 40 years, perhaps, but not in the foreseeable future,” quipped Sen. Travis Holdman, the group’s typically stern co-leader, in remarks to reporters.

Holdman heads the Senate’s tax-focused committee during legislative sessions and authored the legislation creating the task force. He still hopes to knock the income tax rate lower, but he has repeatedly pushed observers to moderate their expectations.

“Since its inception … my concerns were that the expectations for the results of our work would far exceed our product,” he told the task force Wednesday.

Democrats assailed the recommendations as not providing enough relief to Hoosier taxpayers, and for giving “handouts” to businesses.

The final report was approved in a 9-1 vote, with two absences. It was edited slightly from the draft.

Focus on residential property taxes

The group’s draft recommendations began with a vague directive: “Enact more effective controls on property tax bills.”

Rep. Ed DeLaney, D-Indianapolis, said he saw “no focused relief” for homeowners.

He argued that homeowners have gradually shouldered a higher share of the state’s overall property tax burden even though it’s the only property type that doesn’t produce income for owners—unlike apartments, farms or others.

“We could deal with that,” he told task force co-leader Rep. Jeff Thompson, R-Lizton, who also heads the House’s powerful Ways and Means Committee.

“Yes, and I hope to,” Thompson replied.

“We’re not dealing with it in this proposal,” DeLaney countered.

“That’s correct,” came the answer.

The task force added more specific language to the first recommendation during the meeting. Sen. Fady Qaddoura, D-Indianapolis, suggested affixing “particularly for homesteads” to the end. It was approved by consent.

The final report also said that all eligible taxpayers older than 65 “should receive a credit” to ensure bill reductions, and that Indiana “make progress toward” a transparent and accountable property tax system in which taxpayers see bills drop when rates drop.

During the meeting, Thompson noted that local units can raise property tax rates without taxpayers seeing a difference in their bills — but that the reverse is also true.

“If a local unit, (like) a local school, cuts the rate, the winner are the other units of government that it’s spread to,” he said.

“I have counties that have asked to have a way to get rid of property taxes at the county level. They can’t do it. They can’t do it,” Thompson continued. “Because all the money just goes to other units, the taxpayer doesn’t see a penny change. That’s the fundamental problem in my opinion.”

It’s up to individual lawmakers on what bills addressing these objectives might look like, Thompson said.

Asked if it wasn’t possible for the 12-man group to reach agreement on more specific proposals, Thompson said, “some of that’s in the weeds.”

“To get into a, you know, a 200-page report, to get into the weeds, (that’s) probably not wise,” he continued. “It’s just to give a general direction we want to go and leave it there and then let the bill-drafting process get us to the right spot.”

Benefits for businesses

The report also urged an increase in the de minimis business personal property tax exemption. Right now, businesses with less than $80,000 worth of property qualify for it.

Rep. Greg Porter, D-Indianapolis, attacked that possibility in a letter; he was absent Wednesday.

He noted that de minimis is a Latin phrase that typically means something is trivial, writing, “I do not think anyone would say that the current exemption of $80,000 is a negligible amount.”

Finally, the task force recommended reducing the 30% floor for all business personal property, positing that this would “spur” economic development.

“Republicans will give big businesses even more handouts,” Porter said in a written statement. Although the task force’s report didn’t include parameters for its suggested changes, Porter said local units would take a $300 million hit.

DeLaney echoed that accusation in his own statement.

“We’ve gouged the homeowners,” he said. “This report prefers business interests over our homeowners who continue to lose. Ordinary Hoosiers are paying for complex maneuvers that allow businesses to pay less.”

He added that the property tax caps enshrined in Indiana’s Constitution may be worsening the increasing burden on homeowners, describing them as “failed.”

Holdman said the system could use “tweaks” but didn’t agree it has failed.

Farmland could also see changes.

The report also urged “refine(ment)” of the base rate formula used to value agricultural land but didn’t suggest how.

Right now, the base rate is a rolling average with six years of capitalized net cash rent and net operating income. The Department of Local Government Finance drops the highest value of the six and averages the remaining five years.

Stricter limits on local units

The task force recommended that lawmakers phase in reductions to the overall local income tax (LIT) rate cap to match the state’s income tax rate. Larger municipalities could be permitted to adopt their own LIT rates under the cap.

Right now, counties have three categories of LIT to use, according to the Department of Revenue’s (DOR) most recent bulletin: an expenditure rate of up to 2.5% (2.75% for Marion County), a property tax relief rate of 1.25% and some county-specific special-purpose rates.

The state’s income tax is 3.05% for 2024, according to DOR. It’s scheduled to keep ticking down and hit 2.9% in 2027.

Holdman said Indiana’s local units have $4.8 billion in untapped LIT capacity.

The report also recommended using geographic information systems to improve collection and distribution of LIT revenue. Thompson said the technology is “coming along.”

Task force’s trajectory

Indiana lawmakers entered the last legislative session hoping to ditch the income tax, which supplies about a third of the state’s revenue; they aimed to pay off the state’s biggest unfunded liability—a public teacher pension fund—and use freed-up dollars to plug the hole.

Holdman, in an early 2023 missive, described authoring the task force to “plan for the future and explore our options.”

Indiana’s budget chiefs offered a measured sense of optimism on the state’s finances at the group’s first meeting that August, but former lawmakers and outside experts seemed skeptical Indiana could or should get rid of the income tax the next month, in September.

Filling the income tax revenue gap with a higher sales tax would cost poor Hoosiers more, a liberal-leaning think tank told the group in October. Also at that meeting, conservative think tanks recommended that lawmakers keep to a recently approved schedule of gradual cuts and go further with “caution”—telling the group that totally replacing $8 billion is “definitely not possible,” at least in the short term.

In November, another conservative think tank described how other states had gotten “on the path to zero” income tax, according to presentation notes, and gave the task force 10 “traps to avoid” in tax reform, like offsetting cuts with new impositions. The group also heard from a property tax expert.

But by December, Indiana’s Family and Social Services Agency delivered news of a major financial blow: a nearly $1 billion projected Medicaid shortfall. The state pulled from its reserves to cover the error.

In its next meetings, the task force continued shifting its focus to property tax reform for schools and farmers, and examined taxes on sales and businesses.

Now, as the group’s activities draw to a close, the state faces sobering tax revenue news: collections have lagged projections from late last year by $243 million.

Looking toward session

Legislative leaders attempted to temper expectations on Monday, describing the upcoming budget-building session as a “challenge” featuring less money than in previous years to solve intractable issues.

Still, Republican House Speaker Todd Huston highlighted “significant” property tax relief as a goal during session’s ceremonial start on Tuesday, while GOP Senate President Pro Tempore Rodric Bray said he expected “more than tweaks.”

Indiana will build its budget—and its tax changes—under Gov.-elect Mike Braun. Holdman said he’s had numerous conversations with Braun’s team.

Braun has pushed to return property taxes to 2021 levels, but Holdman warned reporters that there’s no messing around with assessed value, citing a court order.

Braun also proposed capping bills to 3% increases annually, which Holdman said could be “possible,” especially elderly or low-income Hoosiers.

The Indiana Capital Chronicle is an independent, nonprofit news organization that covers state government, policy and elections.