Indiana’s Property Tax Cap, Explained
Indiana voters passed an amendment to the State Constitution by referendum in 2010 which made permanent changes to the local property tax formula.
The measure limited local property tax rates to one percent for residential homesteads, two percent for commercial property and second homes, and three percent for industrial and agricultural property. Tax rates set through referendum are exempt from the prohibition. If a school’s tax rate exceeds the cap, then the shortfall must be made up by other entities in the taxing group — for example, the city, township or county.
Governor Mitch Daniels proposed and designed the amendment, which effectively limits the amount local governments and schools can raise by issuing bonds and debt without turning to voters for approval. More than 70 percent of voters cast ballots in favor of the amendment.
My School Owes Who? How Bonds Work
Up until recently, Indiana school districts could take out a kind of loan to pay for expensive construction projects or to help them get through rough times. Such a loan is referred to as a bond. Similar to bonds issued by private companies, these are essentially IOU’s issued by the school.
In Indiana, schools cannot issue bonds in excess of 10-million dollars for elementary and middle school construction or 20-million dollars for high school construction projects without voter approval. Bonds are also limited by Indiana’s constitutional tax cap. Without a referendum, schools cannot issue bonds which would cause their total property tax rate to exceed 1-percent for homestead properties, 2-percent for non-homestead residential and commercial properties, and 3-percent for industrial and agricultural property.
There are currently a number of schools hitting the property tax cap because of outstanding debt issued prior to the passage of the amendment.