Indiana business personal property tax laws: the discussed changes and potential impacts

As you may have heard, changes to the way business personal property is taxed in the state of Indiana are being discussed. Of course, there can be a big difference between knowing about the potential changes and understanding the impacts of those changes.

It can be a complex topic, but there are some key points that can help you better understand the implications of the potential changes.

Setting the scene

According to the 2021 abstracts for Indiana counties, approximately 14.9% of Indiana’s total property tax base comes from business personal property assessed value.

While there is a discussion of legislative changes that would see that number reduced significantly (or even eliminated entirely), the result would be that doing so, holding other factors constant, would place an upward pressure on property tax rates, which would impact non-business personal property taxpayers and potentially increase local government units’ revenue losses due to the Circuit Breaker Tax Credit.

The impact on local governments can vary depending on each taxing units’ mix of real and personal property in its property tax base, as well as the current property tax rates in each taxing district, among other factors.

Generally speaking, property taxes in Indiana are used to fund operational expenses and capital projects needs at all levels of local government. Many taxing units utilize debt that is paid from property tax levies to fund significant capital projects.

A reduction in the assessed value that comprises the property tax base of a taxing unit would require a higher property tax rate to generate the same amount of property tax levy. Reductions in property tax liability for personal property taxpayers that would result from a reduction or elimination of business personal property assessed value would be offset by increases in property tax liabilities for other property taxpayers. Such increases could cause these taxpayers to exceed their Circuit Breaker tax cap amounts, with increases above those cap amounts resulting in increased revenue losses to local government taxing units.

The local government and public school impacts

If property taxes increase above a non-business personal property taxpayer’s Circuit Breaker tax cap amount, the end result is an increase in Circuit Breaker losses for the local taxing units. Increases in Circuit Breaker losses can impact local taxing unit’s ability to fund operating and capital costs on an ongoing basis.

The ramifications of this may be significant, depending on the assessed value mix and property tax rates of each taxing district. Increases in tax cap losses may cause communities to seek alternative revenue streams, such as increases in local income taxes, user fees or pursuit of operating or capital referendums. Units may even need to defer needed capital or maintenance projects, or even reduce service levels for constituents.

School districts facing potential increased tax cap losses could be forced to transfer state funding from their education fund to their operations fund to sustain operating budgets. These transfers could impact different areas, such as a school district’s ability to comply with and sustain the $40,000 first-year teacher pay threshold. Further, revenues from any existing operating referendums could be redeemed.

A reduction or elimination of business personal property assessments would also hinder the ability of cities, towns or counties to utilize tax increment finance (TIF) revenues derived from business personal property investments as an economic development tool.

Communities around the state utilize TIF revenues derived from business personal property for a variety of economic development purposes, including infrastructure, site development, site acquisition, capital expenditures, workforce training and local educational programming. Additionally, recent years have seen more communities use TIF revenues to fund “quality of place” projects to improve the quality of life for current and prospective residents and as matching funds for federal and state programs, such as the Indiana Regional Cities initiative.

Additionally, the ramifications of reducing or eliminating business personal property assessed value would extend to municipal bond issuers around the state. A reduction of the property tax base would necessitate a higher tax rate to fund debt service payments, and such increases may run counter to the assumptions the issuer used in authorizing and structuring outstanding debt issues or cause potential issuers to reassess their ability to fund projects through debt. The potential increases in tax rates would also cause issuers to balance providing services against meeting debt obligations.

Our summary of the situation

Indiana’s property tax system consists of many interconnected components, and changes to one component can impact the full system. Reductions in the property taxes for some taxpayers may cause corresponding increases for other taxpayers if a unit needs to maintain the same level of funding for services and capital needs. It is also important to note that these impacts will not be at the same level in each county, or even each taxing district, given the unique compositions of each unit.

Baker Tilly has a specialized Indiana-based public sector team poised to help you understand the layers of impact that potential personal property tax reform legislation may have on your community and how to mitigate any negative impacts that may result.

We are immersed in this complex situation, and we are here to help you assess the impact today to better prepare for tomorrow. Connect with a local Baker Tilly public sector specialist to learn more or to discuss your community's/taxing unit's specific situation.