By Larry DeBoer
Consider the eternal questions. Why is the sky blue? Why is the grass green? Why are some Indiana local government property tax rates high, while others are low? Let’s leave the answers to the first two to actual scientists. I’ll take a stab at that last one.
Suppose we measure the revenue capacity of Indiana local governments. Our counties, cities, school districts, libraries and townships receive revenue from property taxes and local income taxes. Schools get a lot of aid from the state. Counties, cities and towns receive state aid for roads. And there are interest earnings, charges and fees, and dozens of other smaller revenue sources.
Let’s calculate the average property tax rate for all Indiana local governments, then multiply that rate by the taxable assessed value in each county. That gives the amount they could collect if their tax rates were just average. Calculate the average revenue from local income taxes by multiplying the average local income tax rate by each county’s taxable income.
Then add in school and road aid, which depend on state aid formulas. And take the state average of the other revenues per person, and multiply by county population.
Add it up. That’s the amount that local governments in each county could raise if they behaved like the state average. It’s a dollar measure of revenue capacity.
The median county has $2,553 per person in local government revenues at average tax rates. You can see the numbers and an article explaining it all on the web at pcrd.purdue.edu/ruralindianastats.
Some counties have high capacity. Benton County has all those wind turbines and very few people. They’d raise $4,572 per person at average tax rates. Boone has high incomes and high home values. Their local governments could raise $3,371 per person at average tax rates.
Some counties have low capacity. Delaware County has a lot of people, but has lost a lot of its industry during the past couple of decades. Its capacity is $2,019 per person.
To answer the tax rate question, though, we need to know about the costs of local government services, too. It costs more to deliver services like police and fire protection in cities and towns. So, take the state average appropriation by cities and towns times the number of people in cities and towns in each county.
School kids are expensive. Schools are the biggest government expenditure we’ve got. Multiply the state average appropriation per pupil by the number of pupils in each county. Do the same with average road appropriations per road mile, and the average of everything else per person.
Again, add it up and it’s a measure of service costs for the local governments in each county, if services were delivered at the statewide average cost. The median cost per person is $2,508.
Some counties face higher costs. Clinton County has a lot of school kids as a share of its population. Its service cost number is $2,914 per person. Urban counties have a lot of city and town population, of course, but usually fewer school kids.
Their service costs depend on that balance. Lake has higher costs, $2,709, while Vanderburgh has lower costs, $2,204. Suburban Hamilton has lots of population in cities, and a lot of school kids too, which produces service costs of $2,998 per person.
Now, let’s put revenue capacity and service costs together in a capacity-cost index. Just subtract costs from revenues. Then, if the index is positive, it means that the local governments in the county could more than meet the costs of average services with average tax rates.
But if the index is negative, average tax rates won’t be enough to meet the cost of average services. To cover those costs, a county would need higher than average tax rates.
Sure enough, it turns out that counties with negative capacity-cost indexes do tend to have higher average property tax rates. Counties with positive capacity-cost indexes tend to have lower average tax rates. Less revenue capacity and higher costs make for higher property tax rates.
Lots of other factors enter into the tax rate decision. But it’s true that a county’s economy and population are a part of its tax rate destiny.
Larry DeBoer is professor of agricultural economics at Purdue University. Send comments to [email protected].