Tuesday, August 21, 2012

Indy's Income Problem

Posted By on Tue, Aug 21, 2012 at 8:30 AM

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As the Indianapolis City-County Council gets ready to take up Indianapolis Mayor Greg Ballard's budget and possibly come up with an alternative plan to close a $35 million - $65 million budget hole, I think it probably wouldn't hurt to take a few minutes and talk about the real root cause of Indianapolis' money problems. As much as some individuals would like to blame the shortfall on property tax caps, in fact, Indianapolis' problem is that the city does not have enough taxpayers.

Allow me to explain. Opponents of property tax caps say that because they exist, local governments have been robbed of badly needed revenue, never mind the fact that people were losing their homes because of skyrocketing assessments, but that's beside the point. Under the tax caps, Indianapolis went from collecting close to $450 million in 2007 to slightly more than $300 million in 2013. However, the big drop off in property taxes took place from 2008 to 2009, when it dropped from about $400 million to about $275 million. Since then they have stayed relatively stable at the $300 million mark.

Income taxes are a bit of a different story. First of all, you have to know how local government finance works. When the state collects income taxes it doesn't immediately disburse them to local governments. It actually takes anywhere from 18-24 months for the money to get to the local level. So the income taxes the city is receiving today was actually collected back in 2010 ­— during the worst economy since the Great Depression. Back in 2010 the city was getting disbursements based on 2008-2009 income tax collections. Today state revenue collections are up, which bodes well for the city's income receipts a couple years down the road.

Still, the only long-term solution to the city's revenue crunch is to create more taxpayers, which in turn will translate into more taxes. This is why things like TIF Districts are important. They create jobs and economic development in areas where there are none. And this is why we also need to continue to improve the quality of education in the city. Good schools mean an educated workforce and that makes it easier to attract quality employers. This is also why the city's AAA bond rating is so important. The bond rating is important because it shows the city is stable and businesses can come and set up shop here. Even things like hosting a Super Bowl help because it puts the city on the radar screen of potential employers looking to escape cities with high taxes and crumbling infrastructure.

The only real solution to the city's financial problems is long-term economic growth, which comes from making more taxpayers and creating more jobs. Until then, tighten your belts and enjoy the property tax caps.

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