Indiana lawmaker proposes ending property taxes with new service tax

LOUISVILLE, Ky. (WDRB) — An Indiana lawmaker said he's working on a plan that would fully repeal Indiana's property tax system and replace it with a 7% sales tax on services.

Indiana collects roughly $10 billion a year in property taxes. That money helps pay for public education, public safety and infrastructure such as roads and bridges. It's essentially the backbone of local government budgets.

Under a proposal created by Republican State Rep. J.D. Prescott, consumers would pay a 7% sales tax on labor-based services that are largely untaxed now. Prescott said that could include services such as landscaping, attorney fees, construction labor and haircuts, though the full list is still being developed.

He compared it to an oil change, where customers currently pay sales tax on parts like oil and filters, but not on labor.

Prescott said the idea began as an exercise in proving it couldn’t be done.

"So I actually started as a skeptic, thinking, I want to show why you can’t do it," Prescott said. "Once I started running the numbers… you can actually do it."

Some exemptions would remain, Prescott said. Health care services would be excluded, along with many services tied to nonprofits, churches and education. He said the plan is designed to treat public and private education on a "level playing field."

According to Prescott, projections from the state's Legislative Services Agency estimate a service tax with those exemptions could generate between $13 billion and $15 billion annually, more than the roughly $10.6 billion Indiana expects to collect in property taxes next year.

"Put that in perspective, we’re looking at bringing in roughly 10.6 billion in property tax dollars next year," Prescott said. "So not only do you reduce the total tax liability for most homeowners… you’re actually raising more revenue."

This is something John Austin, who lives in Lanesville, finds appealing.

Austin said his property taxes are more than $4,000 a year — money he'd rather put to other uses.

"I would love it," he said

Prescott said the shift would take at least two years, to phase out one system and ramp up the other.

He also said eliminating property taxes could reduce administrative workload for county offices and allow the state to significantly downsize the Department of Local Government Finance, which he estimates could save $150 million to $200 million in state and local government costs.

Under the current concept, property taxes would continue through 2028 while the service tax would begin July 1, 2028, creating a short overlap to build a financial cushion before property taxes are fully phased out.

Prescott said the proposal is still being developed. Even if approved by the Indiana General Assembly and signed by the governor, he said the transition would take years to complete.