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A COLUMN BY MICHAEL J. HICKS

Setting budgets, not tax rates, an Indiana problem

Tuesday, May 6, 2014 - 12:01 am

Having lived and worked in three different states over the past decade, I have had occasion to watch the way local government operates. I am interested in how state policy influences the goodness or badness of local government. I start in West Virginia, where I lived a decade ago.

The state decided in the 1930s to make most budget decisions at the state level. All but a tiny share of property taxes are collected by the Legislature and distributed back to local governments using an opaque formula. The Legislature holds about a quarter of total tax revenue in a single large fund it carefully doles out in special earmarks. Successful county or municipal elected officials spend no time on improving schools or paving roads. Instead they lobby the Legislature for earmarks.

The results are a catastrophic deficit of local amenities, bad schools and a lagging economy. Local leadership is all about securing earmarks, not good governance. In 2004 I left for Ohio.

In contrast the Buckeyes have a much more decentralized local government. Mayors, county and township officials, school boards and special taxing authorities make their case for higher taxes directly to voters. Rates are set by referendum, and local governments collect and spend taxes. Here they can observe the ill effects of raising taxes and the beneficial effects of good public services. Most local leaders seek a comfortable balance. In this environment local elected leaders tend to all know how to read a balance sheet and how to think about investing public funds.

Ohio is not a utopia, but in the three years that I lived in one of the most conservative congressional districts in the Midwest, my township twice voted overwhelmingly to raise our taxes to build schools and to install AstroTurf on a high school football field. To Hoosier ears that sounds implausible, but the local school board provided voters a break even analysis on the investments. I am rarely a fan of higher taxes, but that was admirable local governance, due mostly to the way local taxes and spending were structured. Then I moved to Indiana.

Local governments in Indiana set budgets but not tax rates. This astonishes many people outside the state, and is in truth a lot like cutting paper with one-bladed scissors. The result is ragged, with almost no balance between tax rates and local services across Indiana's unfathomably large number of local jurisdictions.

The lack of a clear connection between local tax dollars and the benefits of local spending leave most of Indiana unattractive to residents. Only 12 Indiana counties are winning the national “vote with your feet” election. This, more than any other problem facing the state, is holding back economic and population growth.

Michael J. Hicks is the director of the Center for Business and Economic Research and professor of economics in the Miller College of Business at Ball State University.