Opinion and Economic Analysis

HICKS: Urban-to-rural state tax flow makes sense

January 16, 2010

Unless your hobby is the study of state fiscal policy, the flow of tax dollars from and to your community is probably something of a mystery. Something this basic should be better understood, and that is why the Indiana Fiscal Policy Institute and the Miller College of Business here at Ball State University teamed up to match state taxes and spending throughout Indiana. Those study results were released this week, and I think they are worth sharing.

At the state level, Indiana collects primarily income and sales taxes, which together represent 75 percent of total taxes. The remainder includes gasoline and fuel taxes; corporate taxes; riverboat taxes; cigarette and alcohol taxes; inheritance, insurance and utility-use taxes; and a few really small collections (like sale of excess property).

In most instances, it is pretty easy to figure out where the taxes are paid. In other cases, such as corporate income taxes, both businesses and their workers bear the burden of taxation, and not just within the county that houses the corporate headquarters. This required us to estimate each county’s share of corporate tax from data on worker income and the payment of corporate dividends.

Indiana pays these tax dollars out in more than 550 fund pools. These range from $4.6 billion going to K-12 education to very small dollar amounts (my favorite is $38,000 to preserve the state’s Civil War battle flags). Expenditures on schools are the biggest by far, at a whopping third of the budget. Medicaid expenditures come in second, at 13 percent. This was followed by transportation, other educational expenditures, public safety, conservation and environment, economic development, property tax relief, and general administration.

Allocating most of these expenditures was straightforward, but it is always important to remember that benefits of things like education, health care spending, environmental remediation and public safety are pretty diffuse. They benefit residents far beyond the place the money is allocated.

Our final step was to calculate the net flow of tax dollars, per resident in each county. What we found will surprise some folks. With only a few exceptions, tax dollars flow from urban counties to rural counties. It is the same in the two other states that have done these studies. There is a good reason for it. Urban areas are often retail hubs, and so collect lots of sales taxes. They also have more income per capita, hence more income taxes.

On the expenditure side, education and health care spending move dollars from richer locations (often urban) to poorer locations (usually rural). Also, there tends to be more state and federal highway miles per capita in rural areas, hence more spending per person on roads in rural areas. In the end, it makes sense that tax dollars flow from more urban to more rural places. So it should be comforting to hear, after so many rancorous years of tax debates, that our state tax and spending policies have an air of common sense to them.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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