Indiana tax reform could lead to changes in school funding

Changes to Indiana’s tax code next year will likely have significant impacts on school funding across the state. Any tax reform passed by state lawmakers during the upcoming budget session could impact the amount of money public schools are able to collect through taxes.

Nearly all of Indiana’s public school funding comes directly or indirectly from state and local taxes. Indiana supports schools with money collected from sales and income taxes. Local taxes, like property taxes, support local school districts in a more direct way.

In 2021, almost 43 percent of all property taxes collected went to public schools. However, increases in Indiana’s property taxes over recent years have resulted in some school districts netting less from local property taxes.

Lawmakers introduced measures like tax caps, which limit homeowners’ and businesses’ tax bills, to provide Hoosiers with some relief. Indiana’s constitution was amended in 2010 to include tax caps of 1 percent increases on homestead properties, 2 percent increases on residential properties and agricultural land, and 3 percent increases on nonresidential properties.

When property tax revenue is limited, there is nothing to make up for the loss of funding to local government units like cities, schools, counties and libraries.

Some school corporations said tax caps have left a significant hole in their budgets. And sharp property tax increases over the past few years have only made the problem worse. The Indiana School Boards Association said public schools lost $365 million to tax caps in 2023.

The impact is most significant in areas with high tax rates.

“Since 2019 here in Lake Station, because of the loss of property taxes being paid because of the circuit breaker [tax caps], we’ve lost $7.4 million. That’s quite a hit for our school district,” said Lake Station Community Schools Superintendent Tom Cripliver.

READ MORE: Why do some schools need referendums? Expert says property tax caps complicate funding

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Lake Station asked taxpayers to pass an operating referendum this November to ensure the district can afford transportation, support staff, programs and electives. Taxpayers approved the referendum this year after initially rejecting it last November.

Indiana property tax expert Larry DeBoer said measures like tax caps are a quick solution to long-term problems. He said much of Indiana’s tax reform over the past few decades has been reactive rather than proactive.

“This is the accumulation of 50 years of property tax reforms done in emergencies. So, that’s why we have what we have,” he said.

State lawmakers are looking to reform Indiana’s tax system again in 2025. A task force to review state and local taxes will make recommendations later this month before the General Assembly reconvenes in January.

Kirsten is our education reporter. Contact her at kadair@wfyi.org or follow her on Twitter at @kirsten_adair.