In January, fifty new mayors will take office across Indiana.  From Aurora on the banks of the Ohio River to Gary on the shores of Lake Michigan – and dozens of cities and towns in between – they’ll start turning campaign promises into governing priorities.

But some will confront tougher choices and tighter budgets, and widely varying degrees of taxing and spending flexibility.  Their circumstances go beyond issues inherited from their predecessors; Indiana’s fiscal environment has evolved over time to treat urban, rural and suburban communities very differently.  

Purdue economist Larry DeBoer uncovered this pattern in research supported by the Indiana Fiscal Policy Institute (being finalized for release later this year).  DeBoer created a formula, the Revenue Capacity-Service Cost Index, that assesses local revenue potential alongside average per capita costs for education, infrastructure, police and fire protection and other basic services on a county-by-county basis.

The Index doesn’t analyze individual choices made by mayors and city councils, school boards or county commissions. It looks at underlying conditions to ask: Can local governments afford to provide basic services within (state) average tax rates?  A positive Index means breathing room to cut taxes or increase spending; a more negative Index implies budget strain and pressure to raise taxes or cut costs.

Professor DeBoer calculated the latest Capacity-Cost Index (2018) along with a 2002 version to look for trends across recession and recovery, sweeping changes in how we assess property values and fund K-12 education, and major tax reforms (including a decade of property tax caps).  Here’s what we know so far:

Rural areas are struggling with population losses but have surprisingly stable finances: Farmland assessments are high (and ‘capped’ at 2% versus 1% for residential property taxes), maintaining a solid tax base despite demographic decline.

In suburban areas, dynamics are reversed: Capacity-Cost Indexes were higher in 2002, but as new residents were lured by lower taxes and appealing livability, costs seemed to grow faster than revenue capacity – factoring in caps and credits, residential property and income taxes don’t match added service demands.

But Indiana’s urban counties lost even more ground since 2002, with higher costs and lower revenue capacity (and greater tax cap losses).  ‘Urban Indiana’ dominates population, employment, and economic output, but struggles with a structural cycle of tax increases and budget shortfalls.  We see this first-hand in Indianapolis, where the highest tax rates in the region don’t fully solve infrastructure and other funding gaps.

In all, preliminary data shows nearly 60% of all Hoosiers living in counties with a negative Capacity-Cost Index, alongside a wider swath of (mostly rural) Indiana reeling from chronic flight of people and employers. These circumstances add up to a statewide challenge in need of state-level attention.

Rural areas may not face a short-term fiscal crisis, but need help reversing population trends – continued assistance on issues like broadband deployment, promoting new development via initiatives like Stellar Communities, and efforts to build new growth strategies around local assets and amenities.

Conversely, local tax reforms may be needed for revenues to keep up with costs in growing areas.  Urban counties are especially hard-hit by revenue constraints and funding disparities, threatening the balance of quality services and competitive tax climate in Indiana’s strongest anchors of economic and regional growth.

Speaking of regionalism, it’s time to bridge urban, suburban and rural divides by helping local governments work together and invest in common priorities; this concept is already on the agenda of the General Assembly, which held interim hearings on empowering Regional Development Authorities this fall.

Our new mayors will soon face these issues first-hand, settling into office as lawmakers convene in Indianapolis for the 2020 legislative session.  Serious efforts to restructure local finances at the Statehouse could mean rethinking policies and confronting trends that have developed over decades.  

But these challenges should be a top priority, alongside teacher pay and other rightfully high-profile concerns. After all, local governments are on the ‘front lines’ of providing essential services, promoting quality of life and economic development.  The Capacity-Cost Index questions whether our fiscal structure is aligned with success, especially in places with dynamic growth – a competitive Indiana has to support the governments closest to the people and employers we aim to attract and retain.

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