Indiana's Property Tax Caps: Old Idea, New Approach, and Surprising Incentives

Abstract

Property tax limits are a subject of continual interest among policy makers. Indiana recently implemented tax caps that limit individual property tax burdens to a fixed percentage of market value. The resulting system creates structural deficits that depend on the simultaneous spending choices of all overlapping local governments. This paper highlights the many unusual incentives which spring from this approach to limiting property taxes. For example, we argue that the interdependence of local governments subjected to the caps creates a pro-spending bias. Policy simulations with Lake County are employed to demonstrate the relevancy of the concerns, and the difficulty of eliminating deficits even with large property tax reductions.