David Bottorff, Executive Director, Association of Indiana Counties
Senate Enrolled Act 1 (SEA 1) of the 2025 session is the most significant change in local government finance since implementation of the 2008 circuit breaker tax credits.
It will have many long-term policy ramifications on property tax collection, economic development and local government service delivery, most likely creating a realignment of service delivery. However, local income tax changes will be one of the first new policies to have an impact.
Lower property taxes may come at the expense of higher individual income taxes. SEA 1 offers more options for counties, and some cities and towns, to adopt income taxes to fund local services. People tend to complain less about income taxes because they pay the tax a little at a time through every paycheck. However, from that perspective, it makes them less transparent.
One of the reasons property taxes are so criticized is because they are paid twice per year. I suspect if sales tax were collected twice per year for individuals rather than paying at the time of sale, the sales tax would have equal complaints as property taxes. Income taxes are more reflective of a person’s ability to pay and they align closer with the current economic situation.
From another perspective, the revised local income tax system is more transparent about which unit is establishing the income tax rate and who receives the revenue. More units will have to vote for their income tax rate. For some communities, reliance on income taxes will prove to be less stable as one employer or even one income tax filer may create a substantial reduction in income tax collections.
The implementation of the property tax circuit breaker credits in 2008 was a legislative reaction to dramatic increases in assessments on homes as the state finished the transition from a cost-based assessed value system to a market-based assessed value system. In 2008, much of the reduction in property taxes was offset with state sales tax.
Nearly every substantial change to the property tax system has been the result of abnormal increases in the value of houses. If home values had trended at their historic levels from 2020-2024, substantial property tax changes would probably never have been enacted during the 2025 session.
SEA 1 was also a legislative reaction to dramatic increases in assessments on homes; however, this time the assessed value increases were the result of the historic increased values in the housing market. It is true these values are unrealized gains, but they are gains in property wealth. The assessment and property tax standard set forth by court cases and adopted as policy is an assessment system based upon an objective measure of property wealth.
For local units of government, the offset of revenue reductions on the property tax side for all classes of property; homes, farmland and business personal property taxes will not be solely offset by efficiencies. Such substantial long-term reductions in property tax collections may result in increased individual income taxes. Since most businesses do not pay the local income tax, their property tax cut may be offset by individual income tax increases. It is often claimed businesses simply pass their taxes on to their customers. That may or may not be true, but if it is true, their customers are paying the tax, not all individuals in the county.
For instance, if a boat manufacturer passes the expense of their business personal property tax on to their customers, then the people who purchase boats are paying the expense of the business personal property tax for that company. If reductions to business personal property are offset with local individual income taxes, then every income earner in the county is paying higher taxes to make-up the reduction in the business personal property tax cut for the boat manufacturer.
Consequently, this may result in the overall tax burden for some individuals being more than their reduction in property taxes. Also, under SEA 1, non-resident property owners see tax reductions while resident income earners may experience individual income tax increases. Consider a community with “vacation” secondary homes on a lake. The owners of “vacation” secondary homes do not pay the local income tax but they may receive a property tax cut under SEA 1.
Relying more on local income taxes to fund local services may be more acceptable to the public than property taxes, but relying on income taxes may come at the expense of overall higher taxes for some individuals.
SOURCE: Indiana Capital Chronicle