Local Fiscal Challenges Belong on The State Budget Session Agenda

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Chris Watts is president of the Indiana Fiscal Policy Institute. Chris Watts is president of the Indiana Fiscal Policy Institute.

Out of the hundreds of bills on its docket this year, the General Assembly has a constitutional duty to pass only one – a biennial budget.  But as lawmakers wrangle over statehouse spending issues like teacher pay, they can’t neglect their role in the budget challenges facing city halls and county courthouses.

A mix of state policies, local decisions and judicial interpretations all shaped today’s climate, filled with jostling for space under property tax caps and grappling with revenue shortfalls.  As Indiana struggles to find the right balance between traditional affordability and higher-tech economic aspirations, we have to consider whether our ‘do more with less’ approach to local government helps or hurts our cause.

Any  such discussion has to start with a refresher on the impact of property tax caps: There are thousands of taxing authorities – counties, cities and towns, townships and special districts like libraries – across Indiana.  Many levy property taxes, but individual tax bills are ‘capped:’ Homeowners pay up to 1% of their home’s assessed value, farmers and landlords pay 2%, and other business properties are capped at 3%.

When a property owner hits their cap, all the overlapping layers of government dividing up that tax revenue get less than anticipated. This means hundreds of millions of dollars a year uncollected by local schools, for local roads, police and fire protection and other services.

Property taxes have been capped for a decade, but Indiana has been gradually replacing property taxes with sales taxes to support schools since the 1970s.  Other local units have gained authority over (primarily) income taxes but remain in a tough spot: Per capita revenues are down, income taxes are more volatile (rising and falling with the economy), and the caps make unexpected deficits an annual threat.

For many Hoosier taxpayers, the tradeoff has been a more predictable property tax bill, but less predictable performance from the governments closest to them.  Spending on capital projects has dropped sharply, the cost of police and fire protection has crowded out other priorities from leaner budgets, and there’s less ability to plan ahead or make long-term commitments.

Every legislative session seems to feature a raft of legislation trying to reform or repair some peripheral part of this system.  This year there are bills to give counties fiscal authority over library boards and give school districts a voice on redevelopment commissions, to bring more clarity to the shared challenge of the caps. 

There are plans to compel townships to spend their unused surpluses and to free up revenues from tax increment districts for everyday infrastructure needs.  There’s also a potential fix for a looming court decision (involving the Hancock County Assessor) that could classify certain sewer and stormwater fees against the property tax cap limits, wreaking even more havoc across local public finance.

So, while the massive budget bill (HB1001) will set state spending priorities, a dozen or more proposals are aimed at influencing the fiscal choices made by counties, cities and towns for years to come.  But changing the current trajectory will take more than tweaking TIF rules or tinkering with library tax levies.

Soon-to-be-released research from the Indiana Fiscal Policy Institute charts revenue-and-expenditure trends over the last forty years (from the ‘Bowen tax package’ to market-rate assessments and the tax cap era).  It confirms that local government spending in Indiana is consistently lower than the U.S. average, and has diverged more sharply over the last decade. 

The authors don’t draw conclusions from the data, but their findings suggest a growing concern for Indiana’s future amid a broad consensus that human capital is our top economic development issue; to build a broader tax base and more competitive business climate, we need more Hoosiers contributing to our talent pool.

But people are attracted to places with a vibrant quality of life, cultural and recreational amenities, diverse neighborhoods that offer the basics, like safe streets and good schools.  Local investments are vital in creating appealing places to live.  Local government may be surviving under its current constraints, but have we created a revenue system that impairs our ability to thrive in this competition for talent?

Whether through ‘investment hubs’ or some other new fiscal framework, we should find ways to empower local governments to realistically consider longer-term capital needs and transformative investments in livability, acting regionally as appropriate.

The Fiscal Policy Institute is ready to add independent analysis to this important discussion; we may not find the right answer this year, but we have to start thinking beyond the two-year budget cycle to the twenty-year challenges facing the local communities and metropolitan regions that are the building blocks of our economy, and the places Hoosiers call home.

Chris Watts is President of the Indiana Fiscal Policy Institute.

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