Don’t mix up questions of cash flow, general good in state tax debate

Is Indianapolis sucking the rest of the state dry? Or does Indianapolis subsidize the rest of the state?

This issue was addressed in a 2010 study, “Intrastate Distribution of State Government Revenues and Expenditures in Indiana” sponsored by the Indiana Fiscal Policy Institute and conducted by the Center for Business and Economic Research at Ball State University. The study concluded the people and businesses of Indianapolis (Marion County), in 2009, paid $420 million more in taxes and fees to the state than they received back as expenditures by the state. In general, 22 urban counties “subsidized” 70 rural counties.

Despite wide circulation when the study was released five years ago, politicians continue to inflame constituents over the issue, unwilling to end decades-old urban-rural hostilities.

Let’s understand the near impossibility of getting a decent answer to the question, “Who are the winners and who are the losers in the redistribution of tax funds among the counties?”

The sales tax is the largest source of tax revenue for Indiana (about 45 percent). But where does that money originate? No one knows.

The State Department of Revenue issues a report annually ascribing sales tax revenues to specific counties. However, sales taxes collected at that chain store in your county might be bundled with those of stores in other counties and sent in as a consolidated report. Although some attempt may be made to estimate actual revenues by county, it is no substitute for county- specific reporting as is prevalent in other states.

Now throw in another problem: Residents of Warrick County do a lot of shopping in Evansville (Vanderburgh County). The result: Vanderburgh ranks second in the state for sales taxes per capita, more than twice the state average, while Warrick ranks 89th, just a third of the state average. Where do the people of your county shop? Where do the people shopping in your county live? We don’t know.

Thus, the report by county of where the largest chunk of state tax revenue comes from is fundamentally flawed.

More difficult is allocating expenditures by county. Are we looking at the flow of funds or the more philosophical question “Who benefits?” Right now the state is repairing a bridge on I-65 in Tippecanoe County.

Are the beneficiaries the residents of the county, the employees of the companies doing the work, or the travelers who will use that bridge? Do we know where those workers or those travelers live? This is the fundamental confusion in the study where, for example, expenditures for prisons are allocated to each county according to its resident population, not to the county in which the prison is located.

Is our concern the narrow, political and parochial one of balancing cash flow or the broader question of the general good? The two should not be mixed together.

Morton Marcus is an economist, formerly with the Indiana University Kelley School of Business. Send comments to dr-editorial@greenfieldreporter.com.