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During the 2025 legislative session, the Indiana General Assembly passed Senate Enrolled Act 1, which made various reforms to Indiana’s property tax system. Many of these reforms impacted local governments, and schools were no exception.
SEA 1 was the most recent noteworthy piece of legislation, but it’s not the only time the General Assembly has made policy reforms that impacted school funding.
For example, in recent years it also passed legislation to increase minimum teacher salaries, lower debt service caps (which were lowered further in SEA 1) and share property tax revenue with charter schools.
In fact, it seems the General Assembly is making policy changes that impact school funding almost annually. While those policy changes may have merit or be necessary, there are some underlying truths about school funding inequalities that are preventing these policy changes from having their fully intended impact.
Article 8, Section 1 of the Indiana Constitution states that the Indiana General Assembly has a duty to provide “a general and uniform system of Common Schools.” Yet, under Indiana’s current system, that is really only a half truth.
Currently, schools are funded by two main sources of revenue: state appropriations for a school’s Education Fund and local taxes for a school’s Operations Fund.
In many ways, the General Assembly is meeting its Constitutional requirement on the state appropriations side of the ledger. Indiana’s school funding formula is straightforward, allocating funding based on student enrollment in a mostly equitable manner where each student equates to a set amount of money to ensure classroom instruction is funded uniformly.
However, the statutory system that determines how local taxes fund school Operations Funds is creating significant funding imbalances in school districts across the state.
A simple way to think about a school’s Operations Fund is that it pays for operating expenses that occur outside the classroom, including busing, building maintenance, security, and other infrastructure costs.
Funded completely by local tax revenues, the state provides no support or equalization for this fund. Districts with strong commercial or industrial property bases generate more property tax revenue. Whereas districts that are highly residential or have a declining industrial base are at a disadvantage.
In fact, two districts could have a similar number of enrolled students and similar overall assessed property valuations, but if one district has more industrial and business property it will receive millions more in Operations Fund revenue. The result being a nonuniform and unequal system where a student in one district is ostensively worth less than a student in another district simply because of where the student lives.
How is this possible? The school districts most impacted by this are also the ones most impacted by Indiana’s property tax cap structure, which limits how much homeowners, farmers, and businesses can be taxed by creating different rate caps for each category of property.
Industrial and commercial properties are capped at three percent, agricultural land at two percent, and residential properties at one percent. This is what allows industrial-heavy districts to collect more than residential-heavy districts, even when tax rates and assessed values are the same. With that said, the impact of the caps on Operation Funds does not mean property tax caps are necessarily bad policy, but it is reflective of a school funding system that fails to properly account for the impact other state policies are having on school funding.
It should be noted school district leaders have little input in how communities are developed. They are at the mercy of others for local economic development decisions, policies, and histories.
Further, some residential-heavy districts find themselves in a catch-22 situation: if the district creates highly performing schools, it will likely attract more residents with children to attend those schools thereby simultaneously increasing operational costs while also making the tax base more residential, which exacerbates its revenue problem. For districts in that situation, they are being financially punished for their success rather than rewarded for it.
While this underlying issue continues to persist, the intended impact of other state policy changes will be limited because those changes will not impact school districts equally.
The General Assembly needs a plan to address school Operations Fund inequality as it moves into the 2026 session and beyond.
Like the Education Fund, allowing Operations Fund revenue to equate to a set amount of money for each student will ensure school operations are funded uniformly and fairly—and thereby allow the General Assembly to make future policy changes impacting school funding from a stronger foundation that will lead to equal impact for all school districts across the state.•
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Brad Boswell is an attorney at the Indianapolis office of Faegre Drinker Biddle & Reath.
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