Commentary: Indiana’s property tax cut will shrink local government — and economic growth
by Michael Hicks, Indiana Capital Chronicle
January 26, 2026
Indiana’s Senate Enrolled Act 1 of 2025 delivered what many voters have wanted for years: lower property taxes. Homeowners received higher deductions, but businesses — especially those with substantial personal property — saw significant reductions in tax liability.
Let’s compare the two. A family who owns a $400,000 house would see a $300 cut, the maximum, each year. A business that owns $400,000 worth of personal property would see their taxes cut by $12,000 a year.
In the short run, these changes might be popular. In the long run, however, they will likely weaken municipal governments across the state and undermine the very economic growth the law was meant to encourage.
Property taxes are not simply another revenue source. They are the primary funding mechanism for local government in Indiana. Police and fire protection, street maintenance, parks, libraries, and much of public education depend on property tax revenue. When those revenues fall, local governments do not gain new efficiencies by default; they lose capacity.
SEA 1 reduces assessed values and effective tax rates across much of the property tax base. While the legislation phases in these changes, the cumulative effect is substantial. Cities and towns will collect significantly less revenue over the coming decade, even after accounting for modest economic growth. This is not speculative. Local fiscal officers across Indiana have already projected sizable structural deficits as the law takes effect.
While homeowners receive modest, broadly distributed relief, the most dramatic change are sweeping business tax cuts.
– Michael Hicks
The design of SEA 1 matters. While homeowners receive modest, broadly distributed relief, the most dramatic change are sweeping business tax cuts. In many communities, this removes a large share of the commercial tax base entirely. The result is a sharp decline in taxable value that cannot be offset by growth alone.
Supporters of the law argue that local governments can replace lost revenue through local income taxes. That option exists, but it is far from costless. Local income taxes are paid by workers, not property owners, and they are far more sensitive to economic cycles. Communities with slower job growth or lower incomes will struggle to raise sufficient revenue, even at higher rates. Others will simply choose not to increase taxes, forcing cuts instead.
These tradeoffs are not evenly distributed. Large cities with diverse tax bases may absorb some of the loss. Small cities and towns cannot. For many rural and mid-sized communities, even modest revenue reductions translate into fewer police officers, delayed infrastructure maintenance, or closed public facilities. Over time, those cuts accumulate.
The economic consequences of this erosion are well-documented. Public safety, infrastructure quality, and school performance are among the strongest predictors of local economic growth. Businesses do not locate in places with crumbling roads, understaffed emergency services, or struggling schools simply because taxes are low. They locate where public services are reliable and labor markets are strong.
Indiana school leaders warn property tax reforms are destabilizing public education budgets
The fallout of this will happen fairly soon. I expect close to 100 municipal governments will declare fiscal emergencies because personnel cuts will be so dramatic. But, there is a grimly humorous side of this. The number of Indiana local government employees is near a record low, and lower than in every year before 2020 for which we have data.
This brings us to education. While the state now provides most operating funding for K-12 schools, property taxes still play a critical role in capital projects and transportation. Reduced local revenue means deferred maintenance, fewer facility upgrades, and growing disparities between districts. Over time, this affects workforce quality—Indiana’s most important long-term economic asset.
The lesson here is not that tax relief is inherently harmful. Indiana’s earlier property tax reforms succeeded because they were paired with stable replacement revenues and realistic assessments of local fiscal capacity. SEA 1 breaks from that tradition. It cuts deeply into the local tax base without providing a durable, statewide mechanism to replace what is lost.
Fiscal policy is ultimately about tradeoffs. Lower property taxes today mean fewer public services tomorrow. If those services are central to economic growth—and they are—then the policy choice becomes clearer. Indiana has managed to a few hundred dollars per household in the short run at the cost of weaker communities and slower growth in the years ahead.
The second grimly funny aspect of this is that with these lopsided property tax cuts, local governments are going to have to raise local income taxes. SEA1 was hastily put together, and relied so heavily on a study that favored business interest over objective fact. The result was a huge business tax cut that will almost surely cause an overall tax increase for most families.
Hoosier families need to think long and hard about the fallout of SEA1, and have some frank conversations with both businesses and legislators about the state’s future.
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Indiana Capital Chronicle is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Indiana Capital Chronicle maintains editorial independence. Contact Editor Niki Kelly for questions: info@indianacapitalchronicle.com.
