Michael Hicks is the George and Frances Ball Distinguished Professor of Economics and the director of the Center for Business and Economic Research at Ball State University. His column appears in Indiana newspapers.
Indiana is reveling in a flurry of national rankings that report a low tax climate. It is natural that Hoosiers should be proud of the work the legislature has done to limit spending and fund pensions. Taxes and expectations about future tax rates matter to households and businesses; influencing their decisions to expand or relocate. But taxes play only a small part in such decisions. The quality of public goods and services matters as well, and in that regard we face meaningful challenges.
Over the past few weeks, my job has provided me the occasion to drive across the Indiana border to and from Illinois, Ohio and Kentucky. The only noticeable difference, and it was wildly noticeable, was the quality of roads. Indiana seems to have become the pothole capital of the Midwest. Recently dodging one such behemoth on an Indiana interstate, my wife remarked, “I bet no one driving through Indiana on spring break will be much impressed by our low taxes.” How right she is.
The problem is not limited to interstate highways. Indianapolis roads are in unbelievably poor shape, and that is especially telling. Indianapolis has enjoyed five decades of excellent mayoral leadership from both parties. If Indianapolis cannot pave its streets, we have a structural problem of some consequence, and city governments bear the largest burden of this.
Now, I know the general assembly recently passed a large and exceptionally good transportation bill, the effect of which has not yet fully materialized. But, we have dug a deep hole for ourselves, both literally and figuratively. It will require some time to pave and concrete our way out of our roadway problems. I’ve lived and driven all around the world, including some desperate places. The United States Air Force intentionally cratered the only roads I’ve seen that are worse than I-69 north of Indy. It really is just that bad.
Still, roads are relatively easy to fix. My worry is that Indiana’s bad roadways are only the most visible element of far more vexing challenges that await us in years to come. Indeed, by the mid part of the next decade I suspect Indiana’s local governments will be in a fiscal crisis. This will affect schools, public safety and, yes, roads. Yet, it will be difficult for the general assembly to act until local governments do better with what they have.
Much has been written on the effects of property tax caps, indicting them as the root of this problem. While the tax reforms of 2008 were imperfect, the deeper problem has been an incomplete reckoning by local governments. The fact that so many are still complaining about the tax caps is itself evidence of clinical level denialism.
In truth, local governments in Indiana leave well over one-and-a-half billion dollars a year on the table in wasted economic development incentives and local government that has not reformed itself in size and function. Among other things, the reforms of Kernan-Shepard need to be revisited, but that is not enough.
Indiana has embraced a mindset that wrongly merits the views of business taxes over the reality of robust public services. All of us need to do a better job at thinking through what ‘business friendly’ really means. For too long, Hoosiers have listened to consultants and site selectors who neither live nor invest in our communities.
Their transactional mindset has led communities to overuse incentives and underinvest in the public services that are more important than tax climate. As a result, Indiana has a superb tax climate, with many new businesses effectively dodging many taxes for decades. In contrast our roads and cities that are the antithesis of business friendly. There is no softer way to say it.
Today, existing businesses pay the price for this neglect. They call it a skills gap, but it is really a people gap. We yearly spend a billion dollars to address this problem, with little likelihood of victory. We won’t be successful because the problem is not training people, but attracting them to our cities and towns in the first place. The pothole scramble that currently marks Indiana’s place in the interstate highway system is simply a warning of deeper fiscal and economic problems that require more immediate attention.