Report: Local Indiana Governments Made Tough Choices Due to Property Tax Caps

(MUNCIE) – Faced with revenue decreases due to property tax caps introduced in 2008, Indiana local governments cut spending and employment while raising additional revenue through local income taxes, says a new report from Ball State University.

Dagney Faulk, research director for Ball State’s Center for Business and Economic Research (CBER) and co-author of the study

“The opening decades of the 21st century have been a turbulent time for local governments in Indiana,” said Dagney Faulk, research director for Ball State’s Center for Business and Economic Research (CBER) and co-author of the study. “A court-ordered reassessment exposed fundamental problems with Indiana’s property tax system that ultimately led to calls for numerous property tax reforms and included an organized effort for total property tax repeal.”

“Municipal officials implemented budget and staff reductions for both services perceived as essential, such as public safety, and services perceived as less essential such as parks and recreation. At the same time, a majority of the municipalities adapted to lower property tax revenue by increasing local option income tax (LOIT) rates.”

Local Government Responses to Property Tax Rate Caps: An Analysis of Indiana Municipal Governments,” examined how 28 communities made changes in total local government employment and reduced employment in fire protection, police, administration, highways, and parks, and recreation — services commonly provided by municipal governments.

The communities in the study include Anderson, Carmel, Elkhart, Gary, Lawrenceburg, Shelbyville, Fishers, Indianapolis, Columbus, Greenwood, Evansville, Muncie, Jeffersonville, Bloomington, Fort Wayne, Lafayette, New Albany, Hammond, Danville, Logansport, South Bend, Richmond, East Chicago, Noblesville, Marion, Kokomo, Terre Haute, and  Mishawaka.

Researchers found that 18 municipalities reduced FTE (full-time equivalent) employment between 2010 (when property tax rate caps were fully implemented) and 2015 (the most recent year these data are available), and 15 had lower FTE employment in 2015 than in 2007.

Between 2010 and 2015, Gary experienced the largest reduction in FTE employment (798 workers, 41%) followed by Richmond (69 workers, 12%) and Terre Haute (53 workers, 8.6% percent). These three cities were among the most affected by property tax rate caps.

The study also found:

  • Eight municipalities experienced decreases in their budgets from 2010–2015.
  • Sixteen municipalities reduced fire protection employment between 2010 and 2015. Indianapolis and Gary cut their police force the most over this period, while Gary and Logansport reduced fire protection employment the most.
  • Decreases in police employment occurred in the five municipalities experiencing the largest tax cap impacts.
  • Twelve municipalities decreased highway employment between 2010 and 2015.
  • Seven municipalities reduced parks and recreation employees and only two of those experienced large revenue reductions from tax caps. For a majority of municipalities, both highway and parks and recreation employment were lower in 2015 than before the Great Recession.
  • Eighteen communities increased LOIT rates between 2010 and 2019. Eight of the 11 municipalities where tax caps cut tax revenue by more than 20 percent increased LOIT rates between 2010 and 2019. Lake County, which had not had a local income tax before 2010, began raising revenue from LOIT in 2013.

Also participating in the research were Charles Taylor, a political science professor and the managing director of the Bowen Center for Public Affairs at Ball State, and Pamela Schaal,  an associate professor of political science and public administration at Ball State.

Learn more about CBER here.

Learn more about the Bowen Center for Public Affairs here.