Context for 6 3 weeks of budget-making and property tax policy
Not much has changed over the past few weeks with respect to the external factors affecting the budget – and, indirectly, the parameters of the property tax relief/reform measure, SB 1.
Uncertainty not only continues to reign, but it does so on an even more concerning basis, with intra-day changes, for example, in tariff policies related to commodities and countries critical to commerce in Indiana wreaking havoc on planning for business as well as preventing lawmakers from getting a handle on where they expect the budget toplines to land.
In most budget years, the administration and legislative fiscal leaders have a fairly good grip (with a percentage point or so) on what they expect the bottom line will be headed into the April forecast, and then slightly tinker some line items to bring the reality into alignment with their expectations .
Not so this year, as we’ve been trying to reinforce for you over the past month or two. Global and national economic conditions, complicated by international conflicts and threats of more (when will forecasters begin to incorporate the risks posed by an attack on Taiwan by the ruling Communist Party in China – perhaps in the next budget cycle, or will that be too late?).
Kyle Anderson, an economics professor at the Indiana University Kelley School of Business in Indianapolis, tells WTHR-TV in Indianapolis Wednesday that he sees signs of a recession coming to Indiana. Dr. Anderson is a member of the popular IU Economic Outlook panel. He summarized the forecast for 2025 late last October – before the election – this way: “Our economic outlook for the national economy during the next year is fairly middle of the road and what could be best described as a ‘balanced on trend’ growth path.”
One veteran of the state fiscal process who served on the Revenue Forecast Technical Committee tells us this month that they never experienced the economic volatility and resultant uncertainty headed into the forecast as we are seeing this year (and you can break that down to quarter, month, day, or hour) – including the Democrat-to-Republican transition in 2005 that came with claims of major state shortfalls and creative account transfer protocols that had to be reversed; the 2009 global fiscal crisis and 2021 Covid years . . . and doesn’t envy the task facing the state fiscal pros who will be translating the S&P Global data into what it means for Indiana in both the short term and the two-year budget cycle.
Then, of course, comes the next step, in which the legislative fiscal leaders must decide precisely how much faith to place in the projections . . . and we continue to believe that they will look to discount the bottom line by a minimum of 2.5% (and perhaps as much as 3.0%) due to the lack of clarity ahead . . . and, if they do not choose to pull back on the forecast by such an extreme number, you should expect to hear open talk about the prospect of opening up the budget to any needed significant adjustments in the short session.
While no one wants to bring the budget back into play in 2026 (save, perhaps, some Democrats who see an opportunity to raise the issue of raising human capital spending in an election year), recall that even before economic concerns about 2025 and beyond became a “thing,” this budget was headed to uncertain territory given the concerns about the “original” Medicaid deficit (before any potential federal changes ahead); a legislative juggernaut for universal school choice; preservation of the (universally) popular Community Crossings grant program and the (arguably) popular 92-county public health initiative; and the priorities of a new governor.
Then it became really complicated.
Of course, the budget can’t be viewed in isolation, particularly given the widespread push for property tax relief, at least for residential homeowners and agricultural property as well.
The Governor continues to advocate for relief rather than burden-shifting, decrying lobbyists pushing for their clients and local government units and school districts who won’t tighten their belts. Lawmakers, however, continue to get an earful from those two constituencies, and appear largely sympathetic to local needs while continuing to insist that they can land at a sweet spot with the Governor in the next five weeks (and don’t forget ag and business interests also seeking to avoid shouldering any shifted burden).
Although this is a heavy lift, a compromise is possible, most easily achieved through hidden burden-sharing, but that’s obviously not ideal. Many communities, counties, and school districts have debt that must be paid off (and how would you like to be a unit of government looking to head to market with a bond issue in the next few months?!), have faced a 20% inflation rate in the past few years that has eroded their purchasing power and inflated the cost of public projects (one north central school district this week announced a temporary pause on a long-sought building project) and even patching potholes and paving roads in the case of local units and funding higher teacher salaries mandated by the State, in the case of school corporations. The Governor wants the locals to live on a diet, but seems willing to help offer them tools to raise additional revenue to offset lost property tax revenues, which he sees as introducing more accountability for local officials . . . but you should note, for example, that in some small school districts, as we’ve detailed for several years in our Hannah News Service sister newsletter INDIANA EDUCATION INSIGHT, passing a referendum is nigh impossible; you simply can’t squeeze blood out of a turnip (so is forced consolidation ahead?).
Note that if new special referenda and local tax and fee hikes are authorized now, they would likely not become fully implementable or implemented until 2026 . . . the year before municipal elections. Taking the fall for what they see as the responsibility of the Governor and solons to reconcile is not a chapter in the current edition of the local political playbook that has governed politics and policy for a generation.
So, how should you handicap the stakes ahead?
We’ve been alone in telling you about the multi-front offensive the Governor is prepared to unleash on behalf of his initiatives, focused upon property tax relief. He’s started to use his bully pulpit, traveling the state and hosting carefully staged “roundtable” discussions with specially chosen average Hoosiers whose property taxes have soared in recent years . . . many simply because of increased assessed values as their homes have grown in value based upon surrounding sales, making them appear wealthy on paper, but “home-poor” – unable to tap the equity from higher valuation while being forced to pay higher property taxes on the more expensive valuation . . . while fearing that a bottoming of the economy could wipe out the higher valuation when they decide to sell, but offering them no relief for the higher taxes they paid in the interim.
In addition to the bully pulpit, the Governor and his ancillary public policy (turning quasi-political) arm, Hoosier Hope and its new political action committee affiliate, are readying a new round of paid advertising following up on the initial digital ad campaign that had targeted – and ticked off – recalcitrant Republican senators for holding out against his property tax relief efforts . . . before praising them for being more holistically in support of his Freedom and Opportunity Agenda.
We’re looking for targeted digital ads to kick off the effort, followed by more general radio and television issue advertising flights and perhaps even a direct mail effort coordinated with a sympathetic organization such as Americans for Prosperity – Indiana.
Then there’s also a March 17 property tax rally at the State House that Lieutenant Governor Micah Beckwith (R) is aggressively promoting across his various social media channels. The co-hosts of WIBC 93.1-FM’s Kendall and Casey Show – who have strong ties to the LG – are organizing the early afternoon event, and will be broadcasting their conservative talk radio show live from the State House Monday morning.
The LG has been circulating this chart to make his case for relief:
Lt. Governor Beckwith tells his supporters that “despite overwhelming public demand, the 2025 legislative session has produced virtually no substantive relief from these excessive tax increases. This leaves hardworking Hoosiers struggling under the weight of rising property taxes. Rob and Casey have organized this rally to send a loud and clear message to our legislators: It’s time for real, meaningful property tax reductions – NOW!” Among the speakers will be Reps. Craig Haggard (R), Andrew Ireland (R), and J.D. Prescott (R).
Lawmakers are now performing their surgery (which looks a lot like the Caitlin Clark – Peyton Manning heart surgery television spot for Ascension!) on the third property tax plan, after senators discarded the Governor’s original proposal. Key components of his package included a freeze of future property tax increases by capping the increase in tax bills at 3.0% (2.0% for seniors, low-income Hoosiers, and families with children under the age of 18), and overhauling the homestead deduction to allow every homeowner with an assessed value over $125,000 to deduct 60% of their home’s assessed value from their tax bill. Homeowners with assessed value below $125,000 would be allowed to take the standard deduction of $48,000, in addition to a 60% supplemental deduction.
Senate Republicans countered with a proposal focused upon targeted relief for the elderly; disabled veterans; and low-income, first-time homebuyers, while also flatlining local unit operating spending for 2026 at the 2025 level.
House Committee on Ways and Means Chair Jeff Thompson (R) proffers a third plan for consideration, one which he acknowledges is a work in progress, and which contains elements to which he is not necessarily wed. The Thompson proposal would offer moderate long-term relief to homeowners (after, it seems, some short-term pain in 2027 and 2028) as property tax credits are rolled back and the business personal property tax is phased out (you might draw a parallel to the President’s call for patience during “a period of transition”). This would be coupled with major changes to the local income tax structure.
Rep. Thompson says that the most important part of his version of the bill attempts to fix the issue of homeowners not feeling the relief . . . but he had an admittedly tough time conveying to his panel members the mechanics (and mathematics) of getting there. “Yeah, there’s some calculus involved, I think,” joked Senate President Pro Tem Rodric Bray (R) on Thursday. “I’ll be asking you to come to my district and tell my people to be happy, because I’m not sure this is going to be easily understood,” Rep. Ed DeLaney (D) – who seems to be one of perhaps a handful who does understand the measure – said in the hearing. Rep. Hal Slager (R) tells Dan Carden of the Times of Northwest Indiana, “This is not easy. Right now, I don’t know anyone who fully understands this.”
The search for the Goldilocks “just right” property tax porridge is still a few weeks away . . . or maybe even longer (and no, we’re not necessarily echoing the Guv’s threat of a special session).
This is admittedly a heavy lift, and no one wants to mess up the process by trying to rush it through in toto.
Check out these Thursday comments from Senate leader Bray about the Thompson proposal, and in particular, its local income tax restructuring: “We’ve been in discussions about that for a long time, and I don’t know that we’ll do everything that he’s been talking about in his committee at this point, but I do like where he’s trying to get our property tax system over the next few years.” Sen. Bray continues, “I don’t know that we’ll get all there this session, but we’ll probably continue to try and work to get there, because the opportunity to get where he wants us … will have a direct impact on the change of a person’s property tax bill. That’s kind of where we want to be. It’s a laudable goal,” he adds.
Sen. Bray expounds on that goal. “I think, at the end of the day, where we want to get to us to be – and I think Governor Braun wants to get to – (is) the place where we can say that ‘Your property taxes are lower will be lower next year, in 2026 than they are.’ I think that’s a victory for the Governor and homeowners across the State of Indiana, so that would be the first and foremost goal. Obviously, how much lower … is the question.” He notes that this will be an inexact science, with the problem being “that there’s so much variety in homes across the State of Indiana that it might be significantly lower for one homeowner in one community, and very marginally lower for another.”
House Speaker Todd Huston (R) – who has wielded the gavel in Ways and Means – seems to echo Sen. Bray’s thoughts. Speaker Huston on Thursday lauds the Thompson package as “a very pro-growth, pro-economic development, pro-homeowner plan.” While he says he is “optimistic” that lawmakers will “get to the right place in the next few weeks,” he concedes that “it’s complicated.” “Anybody who says this is simple is being a little disingenuous. It’s not simple, but I feel good about where we are.”
As to whether it’s too heavy a lift to accomplish in the next few weeks, Speaker Huston reminds everyone that what is being proposed “is a transition. It is not an ‘overnight.’ ” He notes that there are components to provide tax relief to property tax owners as early as with the next payment cycle as well as with the 2026 property taxes. “But it’s a transition to the system, and I think we are totally conscious of that. We’ve done it when we even developed the local income tax we made, we made changes a few years ago, and we transitioned that. And I feel good about it. I really do. I think, you know, again, it’s complex, a lot of moving parts, but, you know, I’m excited about getting into a property tax system that … rewards economic development, boards, and provides stability for homeowners.”
Speaker Huston does not see the property tax plan being bifurcated across sessions. “I would like to do both,” he says, referring to short-term relief and long-term reform. “I’d like to begin that process to that transition, because I think it’s really important to show people – if I’m a community, I want to know what I need to do, what I should be thinking about from an economic development standpoint.” He adds, “I think we can point a direction and then fine-tune again …. We fine-tune a lot every year. And you learn and you adjust. I think that’s important. I think we need to lay out – to the very best of our ability – what we expect the long-term property tax system Indiana will look like. I think there’s a consensus for that on some bullet points (the three pillars) I’ve outlined earlier. Now, again, the devil’s in the details on how we get there.”
We’ll reiterate what we’ve mentioned on a few occasions this session: We’re actually seeing what typically takes place out of public view in the proverbial black box of sausage-making. Watching lawmakers work their magic in the full view of the public is an unusual phenomenon, and much of this is happening because they usually begin drafting solutions based upon common premises or toplines . . . both of which are lacking this year in key matters such as property tax reform and road funding. You don’t usually get to see lawmakers thinking out loud in the wild, so savor this moment.
Lawmakers are waiting to break the glass until after the revenue forecast, but some tax hikes and revenue-raisers with little pain (for lawmakers and so-called average Hoosiers) remain rattling around in the legislative toolkit. Among the suite of options are some first-timers:
a Tobacco tax hike (for Medicaid)
a Vaping products tax hike (for Medicaid)
a Sports wagering tax hike
a iGaming for Hoosier Lottery
a Tightening casino free play tax credits
a Casino relocation (with an attendant fee)
a iGaming for casinos
Some mayors are also chatting up the prospect of a sales tax on services (exclusive of health care) as a replacement for 50% of property taxes . . . or perhaps even cutting back on a bit of the sales tax that retailers retain as a collection fee, something that has not been publicly discussed since the early 1990s.
Leaders have been quietly floating the prospect of finally imposing a tobacco tax hike to close the Medicaid deficit since December, and this seems the most likely option, but won’t help with anything for the General Fund like the other potential sources of state income.
The others we outlined – largely focused on the golden goose of gaming – are more speculative, although there would seem to be no real obstacle to granting the Hoosier Lottery the ability to extend its offerings online; that was ready to happen a few years ago administratively until leaders got win of the end run and protected their policy prerogative by banning any such change absent specific legislative authorization. Enough time has passed to put the spat behind them, and with Indiana surrounded by states with online lottery options, Indiana is missing out on a no-pain gain.
For those who have not followed our Hannah News Service sister newsletter INDIANA GAMING INSIGHT over the past generation may not be familiar with the growth of the symbiotic relationship between the gaming industry and the State of Indiana . . . but suffice it to say here that there has been a longstanding understanding between lawmakers, regulators, the governor, and the industry that if the state needs something from or takes away something from the industry, it will proffer something substantial in return.
Perhaps doubling the sports wagering tax (which would till effectively land us behind tax rates of our neighboring states) might be combined with legalization of iGaming (which would bring additional fees and taxes to state coffers) . . . although the state really owes nothing to the sports wagering operators themselves, who are largely existing as independent contracts to state-licensed casinos (perhaps the tax rate for sportsbooks or apps run by Indiana-licensed casinos could be trimmed). Another option for the State: Instead of pulling back on free play tax credits or restricting their transfer, they might allow sale of all nine credits available to licensees (credits for nine are authorized, but transfers are only permitted for seven of those).
We’re done with negotiating for lawmakers here, but just wanted to illustrate for you that there are some easy fixes of sorts to help in part backfill state coffers (and potentially local ones as well) through expanded resources for state revenue-sharing if lawmakers swallow hard.
And note that we keep referring to “lawmakers” – the Third Floor will be driving the budget process this year as the new governor gets his feet wet with his first budget as a chief executive . . . though he participated in drafting a pair of budgets as a member of the House Committee on Ways and Means under two different governors during the Pence and Holcomb administrations.
The bottom line is that getting to the topline will be tough, and deciding who will bear the burden of any property tax relief will prove even more difficult – particularly given the economic uncertainty facing the state in at least the short run. Still, some legislative legerdemain is possible, and you should keep an eye on the options we outlined above . . . even if leaders would likely face some questions about transparency if any of these popped up in early April.