CHICAGO - After a whirlwind three-month legislative session, Indiana lawmakers Friday approved sweeping property tax reform legislation that will reduce residential property taxes by 25%, require referendums on local borrowing plans, and raise the state sales tax.

Property tax revenue will decrease by roughly $1 billion annually through a series of so-called circuit-breaker property tax caps, which cap a homeowner's property tax bill at no more than 1.5% of the assessed value of the house and 1% after 2010; rental property bills at 2.5% and 2% after 2010; and commercial bills at 3.5% and 3% after 2010.

To replace the loss in state revenue, Indiana will raise its sales tax beginning in April to 7% from 6% - generating an estimated $620 million in 2008 - and impose new casino licensing fees at the state's two horse tracks, estimated to raise $250 million this year.

Lawmakers also approved legislation that allows governments to raise local option income taxes by up to 1.25% to compensate for lost revenue.

Beginning in April, voter referendums will be required on local government bond projects that cost at least $12 million or 1% of the district's assessed value, as well as for high school projects that cost $20 million or more, and elementary and middle school projects that cost $10 million or more. The current petition-and-remonstrance process would remain in place for less expensive projects.

At a series of public hearings, local government and school officials warned lawmakers that the property tax plan would mean big revenue losses and that some much-needed local spending would be unable to go forward under the new law.

The final legislation included extra relief for two particularly cash-strapped counties by excluding those counties' debt service from the property tax caps.

As of Friday Gov. Mitch Daniels had not commented on the measure, but was widely expected to sign it, as it adhered largely to his original proposals.

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