Larry DeBoer, Everybody’s Favorite Economist (TM), has a good post on the subject of how inflation might impact local government finance in Indiana. If inflation caused property values, assessed values, income, and permitted levies to all increase at the same time, it wouldn’t be that much of a problem. But the system isn’t structured to allow that to happen. There is a lag between properties increasing in value, the properties being assessed for that increased value, and the increased assessment hitting the tax bill. Permissible tax levies are allowed to increase by the state’s growth quotient which takes into consideration the previous 6 years, so low inflation years prior to a high inflation year will limit the inflationary effect on the growth quotient. There’s also a 6% limit on the increase in maximum levies, so such levies could not catch up to inflation that exceeds 6%.
Larry explains the issues better and in more depth than I do, so his post is definitely worth checking out directly.