It seemed like such a good idea at the time. Indiana legislators enacted property tax caps over a decade ago. Then, in 2010, we added them to the state constitution by a referendum vote of 72% to 28%. I don’t recall much talk at the time about consequences for school funding, but we’re seeing them now.
In some school districts, the consequences look to be devastating.
According to data from the Indiana Department of Local Government Finance, public schools are losing about $268 million in revenue this year as a result of caps. That’s over one-tenth of their total levy, the amount of property tax revenue the districts would otherwise be able to raise.
The impact of the caps varies widely, with big losses for some large and urban school districts: $18.3 million for Indianapolis Public Schools, $17.7 million for Gary Community Schools and $12.3 million for Wayne Township (Indianapolis) schools.
Gary schools are losing almost half of their potential local property tax levy.
When it comes to lost revenue per pupil, the biggest losers include Gary Community Schools, $3,535; Muncie Community Schools, $,1,620; Beech Grove School Corp., $1,450; Anderson Community Schools, $1,298; and Westfield-Washington School Corp., $1,134.
It’s probably no accident that Gary and Muncie are the two Indiana districts to be labeled financially “distressed” and taken over by the state. Muncie was later transferred to Ball State University.
Terry Spradlin, executive director of the Indiana School Boards Association, noted that the state’s 290 school corporations have lost nearly $1 billion to tax caps in the past four years. The legislature has provided districts some flexibility for managing the losses, but it’s still a struggle.
“These are significant issues that are long-term, and there are no easy solutions,” Spradlin said.
Under Indiana’s school funding system, the state pays most school operating costs, including salaries and benefits for teachers and other school employees. But school corporations rely on local property taxes to pay for transportation, capital projects and construction debt.
Indiana’s property tax caps, sometimes called circuit breaker credits, provide different levels of tax breaks for different categories of property. Taxes for owner-occupied homes are capped at 1% of the property’s total assessed value, while caps are 2% for farm and rental property and 3% for business property.
To keep property owner’s tax bills from exceeding the caps, funding is reduced for local units of government, including school corporations – hence the lost funding.
Property tax rate increases that result from local voter referendums are exempt from the caps.
Why do some districts lose much more than others? A big factor, said Larry DeBoer, a tax and government finance expert at Purdue University, is the extent to which school districts overlap with city and town boundaries.
Overall tax rates tend to be higher in areas where the taxing units include cities or towns, as well as county government, townships, libraries and others. That means property tax calculations in those areas are more likely to exceed the caps. When they are reduced, schools get less money.
“Statewide, more than 90% of all tax-cap losses are in areas that overlap (with cities and towns),” DeBoer said. “It’s an urban problem, not rural problem.”
In a paper published in 2015, DeBoer offered the example of two school districts near Muncie, Yorktown and Delaware. The districts are almost identical, except that the Yorktown district includes the town of Yorktown. As a result, Yorktown lost 14.9% of its tax levy to the caps while Delaware lost 3.8%.
Other circumstances that can make school districts vulnerable to tax caps include:
- Declining overall property values, which can cause tax rates to rise above the caps.
- A high share of rental property. Rental property doesn’t qualify for state homeowner tax breaks, resulting in higher tax bills that may exceed the caps.
- High levels of property tax-financed debt, which can result from growing school districts borrowing to build facilities.
Here is a link to an Excel file showing the total dollars lost to property-tax caps for all Indiana school corporations. The figures, for 2019, are from by the Department of Local Government Finance.