Study: Urban tax money subsidizes rural counties

January 12, 2010

A study released Tuesday morning by the Indiana Fiscal Policy Institute shows residents in metropolitan counties subsidize their rural counterparts by paying more in state taxes than they receive in benefits.

While the results may not be unexpected, they demonstrate for the first time in Indiana the disparity in state tax collections and distributions among urban and rural counties, IFPI President John Ketzenberger said.

“The outcome is not surprising, but it does show what has long been suspected,” he said. “And there’s some value in that.”

Overall, taxpayers in 46 metropolitan counties paid 82.5 percent of the taxes, or $11.3 billion, and received 76.7 percent, or $10.5 billion in expenditures, the study said.

The disparity is equally pronounced in the 10-county Indianapolis metropolitan area. Residents there paid 33.5 percent, or $4.6 billion, of total state taxes and received 28 percent, or $3.8 billion, back.

Still, William J. Rieber, an economics professor at Butler University’s College of Business, said the method in which states distribute tax dollars is justified.

“Rural areas don’t have the same infrastructure as urban areas do, so they often need additional help,” Rieber said. “To some extent, we’re in the same state, and we’re all in this together.”

The Indiana study is consistent with the results from other states that examined the distribution of state government finances, the fiscal policy institute said in its report.

Steuben, Kosciusko, Adams and Dubois are the only non-urban counties that collected more tax revenue than they got back from the state.

Steuben County in northeast Indiana is bordered by Michigan and Ohio, two states that have higher gasoline and cigarette taxes than Indiana. As a result, the county collects a larger share of cigarette and gasoline tax revenue.

“You often hear in the Legislature about raising the cigarette tax and the gas tax,” Ketzenberger said. “Some people will say that will hurt border counties, and this bears this out a bit.”

Kosciusko, Adams and Dubois counties have a large number of residents working in a metropolitan area with relatively high household incomes and therefore paid more taxes than other rural areas, the study said.

On a per-capita basis, residents of Vanderburgh County in southwestern Indiana paid the most in state taxes when compared to expenditures, while Cass County in the north-central part of the state received the most benefits.

In fiscal 2009, which ended June 30, Indiana collected about $25.5 billion in total state revenue, of which it allocated $13.7 billion to the 92 counties.

State taxes accounted for roughly 55 percent of Indiana’s revenue in the fiscal year, followed by federal aid at 34 percent, and various state fees at 11 percent.

The sales tax is the largest source of state revenue and generated $6.2 billion in the fiscal year. Individual income taxes, which generated $4.3 billion, were the next largest source. Gasoline and other fuel taxes accounted for almost $800 million.

Indiana allocates spending of tax revenue through roughly 550 separate funds, ranging from K-12 education spending ($4.6 billion) to the preservation and display of the state’s Civil War battle flags ($38,000).

The Ball State University Center for Business and Economic Research compiled the results for the study.



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