Inside INdiana Business

Study: Local governments feeling fiscal strain pre-COVID

The study was authored by Larry DeBoer, a professor of agricultural economics at Purdue University.

INDIANAPOLIS (Inside INdiana Business) — A new study from the Indiana Fiscal Policy Institute says local governments serving the most populated parts of the state were seeing pressure building in their budgets, even before the COVID-19 pandemic hit. The institute says urbanized and faster-growing communities, as well as counties with declining manufacturing employment, are facing increasing fiscal stress.

The “Capacity-Cost Indexes for Local Governments – 2002 and 2018” study says, however, rural counties are seeing more stability due to agricultural assessments. The study was authored by Larry DeBoer, an economist at Purdue University.

“Professor DeBoer’s work shows that economic, demographics and policy shifts are pushing local revenue capacity below costs in counties where most Hoosiers live and work,” said Chris Watts, president of the IFPI. “These places are already more challenged to keep budgets in balance, an ominous starting point before adding the impact of COVID.”

The study used the Revenue Capacity-Service Cost Index, which measures the ability of local governments to provide public services at average tax rates. The IFPI says the index compares county-by-county taxable income, property values and state aid for schools and roads to per capita costs.

Among the key findings of the study, 28 counties that experienced population growth of 5% or more since 2002 saw a decrease in their Capacity-Cost Indexes, due to property tax caps and the homestead deduction in 2009. 

“Revenue capacity does expand with population, adding taxable income, assessed value and education aid as funding follows enrollment,” DeBoer said. “But the homestead deduction seems to tip the Cost-Capacity balance in counties with strong residential growth, reducing taxable assessed value by $73 billion in 2018.”

Conversely, the study says rural counties have steadily improved. While rural populations are declining, the study says service costs have decreased as well and school costs are growing at a slower pace. Increases in farmland assessments and lower tax rates are contributing to the growth in rural counties.

The study also says long-term declines in traditional manufacturing employment has limited capacity growth in many industrial Indiana counties, particularly those that have had difficulty in replacing lost jobs.

“Indiana continues to be the most manufacturing-intensive state in the nation,” said Watts. “The Capacity-Cost Index shows the impact of our manufacturing sector and the importance of diversifying employment – counties that were able to rebuild after manufacturing losses were better able to regain their fiscal footing.”

Watts says the study suggests the state’s current tax structure makes it difficult for its fastest-growing communities to keep up investments in infrastructure, public safety, other necessary services and quality of life initiatives.

You can read the full report by clicking here.