Tuesday, January 26th, 2010

Drew Klacik: Place-Based Clusters

Indiana’s Cities and Their Contributions to the State’s Economic and Fiscal Condition

The Indiana Fiscal Policy Institute (IFPI) and the Ball State University Center for Business and Economic Research recently released a report that proves that in Indiana, as in most other states, when it comes to funding state government urban areas subsidize rural areas (Intrastate Distribution of State Government Revenues and Expenditures in Indiana, 2010). Civic leaders in Indianapolis and other urban areas often battle the perception that urban areas are net takers. But the fact that large urban areas are now documented as net givers rather than net takers may not be enough to change that perception and the entrenched anti-urban bias that accompanies it.

The IFPI report does an excellent job of documenting the patterns of state revenue collection and distribution. However, focusing solely on state revenue ignores the locally subsidized contributions most of these urban counties make to their regions and the state. These contributions include investments in growing the state’s economy in the form of tax abatement and tax increment financing, as well as the provision of services to large, regionally important tax-exempt properties.

For example, the city of Indianapolis provides both tax abatement and TIF to support the hotels, restaurants, and shopping facilities required to attract conventions, Big Ten and Final Four tournaments, and even the Super Bowl to the state. When these big events come to Indianapolis, it is primarily the taxpayers of Marion County who pay for the services, such as public safety, that visitors consume. Additionally, many of the facilities that attract visitors, including the convention center, football stadium, and basketball arena are tax exempt yet located on valuable property.

In addition, core cities make contributions to regional and state economies that go well beyond the convention and tourism industry. In Indianapolis, TIF and tax abatement have been used to attract and retain firms in the life sciences, information technology, advanced manufacturing, and a wide variety of other professions. Indianapolis is home to 18 percent of all the jobs in Indiana and 24 percent of all wages earned. The fact that the share of wages is higher than the share of jobs suggests that the jobs located in Indianapolis are of high value.

I suspect that this evidence is not going to result in an outpouring of support for Indianapolis or any other of Indiana’s urban counties. But what if we looked at the state’s economy spatially rather than from the now traditional industry cluster perspective? Virtually everyone accepts that the life sciences, transportation, distribution and logistics, advanced manufacturing, clean-energy, motor sports, and information technology are the competitively advantaged economic clusters that are essential to Indiana’s economic future. However, if we looked at the state’s economy geographically there are eight place-based clusters in Indiana that contain 48 percent of all the state’s jobs and 54 percent of all the wages earned in Indiana. Furthermore, when you add in their subsidiaries or places where employment and wages are attributable to the core industry, the share of Indiana’s employment increases to 66 percent and wages to 68 percent.

Those eight place-based clusters are Indiana’s most populous and most urban counties—Allen, Elkhart, Lake, Marion, Monroe, St. Joseph, Tippecanoe, and Vanderburgh counties. All but Elkhart are net givers rather than takers. The subsidiaries are the suburban counties that comprise the metropolitan areas that surround these core counties and prosper due to their proximity. By definition, without a core city/county there cannot be an affluent suburban county.

Indiana’s Place-Based Clusters (Graphic by Luke Renn)

To suggest that we think of clusters as place based as well as the more traditional industry perspective is not intended to diminish the importance of industry clusters, rather it seeks to acknowledge that many of our competitively advantaged industries are located in these urban counties and their surrounding metropolitan areas. For example, a study of the life sciences industry in 2000 found that 48 percent of all life science industries in 30 central Indiana counties were located in Marion County (Indianapolis) and an additional 11 percent of the Central Indiana life science firms were located in Monroe and Tippecanoe counties (two of the other core place-based clusters.*

Life sciences employment in Central Indiana

Of course, there are key exceptions scattered throughout Indiana, such as the life science firms in and around Warsaw and advanced manufacturing facilities such as the new Honda plant in Greensburg. More importantly, when we think about supporting the state’s economy, it does not have to be one cluster or the other, rather we should support both the industry clusters and the places where many of those firms are located (the eight core counties). As the attraction and retention of human capital continues to emerge as an important economic development strategy, making sure the place-based clusters are exciting and appealing is becoming an increasingly important strategy to assure that our cluster industries can attract the creative class workers they need to thrive.

These key urban counties have many economic and cultural assets, but not all is positive. Fifty percent of all individuals living in poverty in the state in 2007 resided in these eight counties, average educational attainment levels trail the state average, and many of the urban counties have high crime rates. These issues and others threaten the ability of these counties to continue to be net givers supporting the state’s economy and generate the revenue necessary to invest in the future of our small towns and rural counties

As Indiana and the nation seek to emerge from the most serious economic downturn since the Great Depression, it may make sense to turn to history and consider a notion first espoused by the 1937 National Resources Committee’s report – Our Cities: Their Role in the National Economy. The report suggested that big cities are the drivers of the nation’s economy and that as go the cities so goes the nation. As Indiana begins to work its way out of the recession of 2008-09 perhaps it makes sense to recognize the economic and fiscal importance of Indiana’s place-based clusters and consider how Indiana might invest in our economic clusters (the key industries) and our place-based clusters (where the key industries are located) to jump start our state’s economy. Perhaps most importantly, as the IFPI study suggests, without the tax revenue associated with these economically vital urban areas there will not be any resources to invest in the future of the state’s small towns and rural counties.

Thus investing in our urban areas is not taking resources away from small towns and rural counties, rather investing in our urban areas and making certain that they continue to remain economically competitive is actually a strategy that assures that we continue to have the resources to support the entire state. We cannot have a great Indiana without a healthy core.

* Wolcott, Susan. The Life Science Cluster in Central Indiana. The Center for Urban Policy and the Environment 2001.

Drew Klacik is a Senior Policy Analyst at the Indiana University Public Policy Institute’s Center for Urban Policy and the Environment at IUPUI. Drew’s principal areas of work include economic development, state and local taxation, and community development policy. Much of his work is focused on trying to understand how these issues interact and affect the quality of life and economic vitality of regions. He can be contacted at dklacik@iupui.edu.

Topics: Demographic Analysis, Economic Development, Public Policy, Regionalism
Cities: Indianapolis

9 Responses to “Drew Klacik: Place-Based Clusters”

  1. Alon Levy says:

    It’s a good study – thanks for linking to it.

    I’ve seen some federal tax statistics on the same subject, and they show pretty much the same thing. Even in states that are generally net donors, such as New York and California, the rural areas and very poor urban areas are net recipients; even in states that are net recipients, such as Utah and Arizona, the urban areas are net donors.

    What was surprising about the study was that even small urban areas turned out to be donors. I wouldn’t have thought Evansville a net donor.

  2. I was very surprised to see Evansville so high on the list as well.

  3. carphobe says:

    So, the suburbs have more wealth and are more subsidized than the impoverished areas? And this report does not include transportation funding, which skews things even more; more projects are in the surburbs and they are for suburbanite car-mobility. Quite regressive.

  4. MikeW says:

    Nice post! I read the Indy article when it came out and thought – well duh! But your emphasis on place and industry clusters made it even more apparent and important – a level higher than what the Star could conceive. I think this can help reiterate that the doughnut counties and all need to all get along and work together.

    Evansville is probably a net donor because of it’s large manufacturing and distribution base there – eats up a lot of taxable land. Plus – they are so disconnected from Indianapolis – and actually don’t take kindly to Indianapolis, that they have learned to build their own economy without the help or concern of other areas. Strategy that may work since they tend to be focusing more on the attraction of people and services from the rural portions of Kentucky, Illinois and Southern Indiana.

    I also like the use of ArcView GIS! :0)

  5. MartyL says:

    An interesting study, and thought provoking map as well. I read the study (somewhat quickly, I’ll admit), and it raised a question. To what extent is the cost attendant to maintaining facilities primarily serving urban areas, but located in rural areas, calculated as a subsidy to the rural area? To me, highways linking cities, while having some utility for rural folks, are primarily for the benefit of the cities they link. Similarly a system of state parks primarily serves urban and suburban users, but is located in a rural area. It would, I suppose, be difficult to account for this effect.

  6. Observation says:

    “So, the suburbs have more wealth and are more subsidized than the impoverished areas?”
    “I think this can help reiterate that the doughnut counties and all need to all get along and work together.”

    No, the Indianapolis suburbs of Hendricks County and Hamilton County rank #2 and #3 as net donors in this study, which deals only with state taxes, state services and state-maintained infrastructure. The more populous suburbs rank more highly as net donors than the core city if you read the study. The rural areas are more heavily subsidized, but those residents also often tend to pay there state sales taxes in more urban counties, such as Vanderburgh County. Sales and income tax account for about three-fourths of state revenue. The Indianapolis figures also are somewhat skewed because conventioneers and other visitors, not residents, pay a portion of the sales tax that makes up a large chuck of state revenue.

    “Evansville is probably a net donor because of it’s large manufacturing and distribution base there – eats up a lot of taxable land.”

    Property taxes are local, while this study looks at state taxes. Evansville ranks so highly because it’s the retail hub for a large area while it’s small enough where it’s surrounded by rural counties and not suburbs with malls and strip malls of their own. Bear in mind the data that’s under review here.

  7. Alon Levy says:

    A lot of urban highway and commuter rail projects are built for suburbanites, which would skew the data. In general, on the federal level suburban counties are net donors by higher amounts of money than urban counties for this and other reasons.

    I’m pretty sure that after accounting for such infrastructure discrepancies, the only consistent subsidization patterns are that rich areas subsidize poor areas, and areas with high military or agriculture presence are subsidized beyond the usual.

  8. Paul says:

    I’ve read this study and profoundly disagree with methodology and, as a result, think its conclusions, particularly as they relate to the Indianapolis area, were poorly supported.

    The treatment of sales taxes is the most serious issue on the revenue side. “The General Sales Tax is the largest source of revenue . . . (44.5 percent of total tax revenue). Sales tax revenue was allocated . . .on sales tax collections by county. Ideally the sales tax allocation would reflect the county of residence of the consumer. The data we use reflects sales tax paid by county of purchase . . .” . From page 2 of the report. This approach overcredits urban counties contribution to the state’s tax take due to their dominance in retail sales (note that in Indiana food is exempt from sales tax) because rural county residents are more likely to shop in urban areas than the other way around.

    In contrast, Riverboat gambling taxes, were attributed to county of residence of the gamblers rather than the home county of the riverboat. How are these taxes different than other taxes paid on entertainment? Shouldn’t by this measure the Grant County resident who attends a Colts’ game have the taxes he paid on his ticket have them credited to Grant County rather than Marion County?

    The authors throw out individual adjusted gross income tax payed by out of state taxpayers. Most of this tax presumably comes from workers commuting into the state for jobs. This assumption would seem to diminish the relative contribution of border counties to the state tax take relative to interior counties. Here border counties such as St. Joseph, Allen, Vanderburgh, LaPorte, Steuben and Vigo that import more workers from out of state than they send out of state would have their relative contributions diminished.

    Turning to disbursements, the big, indeed overwhelming, numbers relate to education and transportation. Where the money goes is not really controversial. But there is a philosophical point to consider. Education of the young can be considered an investment in the future. In which case wouldn’t it be “fair” to take into account where children go after they finish their K-12 education? It has been clear for generations that many children in rural areas and small towns don’t stay on the farm, but move to the cities. Rural areas have complained for years that it was unfair for them to carry the full cost burden of education when a large portion of the children they educated moved away when they finished school and that it was the cities and larger towns they moved to gained the benefits of the rural areas’ “investment” in their education.

    A minor point to add relating to state expenditures on education is that metropolitan area residents, again particularly the suburbs, usually have far greater access to private education than do residents of rural areas.

    This education “investment” argument really comes out in the authors’ treatment of higher education. In the words of the authors, “the benefits accrue primarily to students receiving the educational subsidies.” Fair enough. But the authors use this to justify placing “the incidence of this expenditure on the home location of college students.” But college educated former students would seem to be the least likely group to return non-metropolitan areas. The authors’ arguments that it is students who benefit isn’t bad, but taking it a step further of attributing that benefit to where they came from is untenable.

    The authors’ treatment of transportation expenditures presents further difficulties. First they observe that highway related expenditures on a county by county basis tend to be “lumpy” (that is, it varies a great deal) from year to year. They go on to observe that this lumpiness tends to even out over a period of years. But having done this exercise of averaging, for purposes of the report, they looked “only at fiscal year 2009 expenditures.” They noted that this was “not a good representation of the overall equity in transportation funding to the counties”, but did not explain why they picked that particular year other than it was the most recent one or why they didn’t use the averages that they say they calculated. By 2009 the rush of expenditures relating to “Major Moves” (that is the $3.8 billion raised by lease of the Toll Road) had been spent. I recall that one suburban Indianapolis area county, Hamilton, received over $500 million from Major Moves. Is this the “lumpiness” the report wanted to avoid dealing with?

    Speaking of Major Moves, and gasoline and fuel taxes, might I mention that the residents of Porter, LaPorte, St. Joseph, Elkhart and Lagrange counties have to pay tolls for access to their only interstate class highway, but they aren’t relieved of their obligation to pay gasoline and other fuel taxes when they do so. I see no suggestion that tolls paid to the privately operated Indiana Toll Road are considered a contribution to state coffers (or that the proceeds from the lease, which represent a capitalization of those taxes, were attributed to those counties).

    The County share of the Indiana Lottery is allocated based on the excise taxes on automobiles and boats collected from each county, which biases distribution toward metropolitan suburban counties.

    The report totally avoids dealing with where federal funds given as grants to the state are spent. These represent a substantial portion of the state’s eventual disbursements.

    Given the bias in attribution of revenues and the dominance of education in spending I find it impossible to come to any conclusions about where disbursements that relate to economic development go on a county by county basis for much of the state. I can agree that it appears that Vanderburgh County (Evansville) is getting the short end of the stick. However, Indiana is among the states often cited for a regressive tax structure. Still it tends to be higher income counties that were identified as net contributors. (Again not all, St. Joseph County I believe is below average in income). Shifting expenditures on a county by county basis to “cure” the supposed ills identified in the paper would tend to shift expenditures toward high income counties aggravating the regressive tendencies already present in the state’s tax structure.

  9. Paul, there’s certainly no doubt that one can quibble with methodologies.

    I tend to view rural and urban areas as symbiotic. Think about something like Methodist, Wishard or Riley Hospitals in Indianapolis. Indianapolis is home to the only Level 1 trauma centers in the Midwest. When a rural teenage kid wraps his car around a tree, there’s always a helicopter on standby to take him to Methodist. How many rural trauma victims or others would die without access to urban health care? On the other hand, those patients create additional scale that supports further specialized treatments that the urban area might not be able to support without a large catchment area.

    You can think of something similar for airports. What type of economic development would many of these rural areas have without access to urban airports? Similarly, that demand helps to boost the airport’s fortunes.

    Of course, these facilities are tax exempt. Also, I might suggest that urban areas would still have trauma centers and commercial air service without rural ones, but not vice versa. But on the whole I think the relationships are win-win, not either-or.

    But there is one clear and overwhelming area of asymmetry. And that is rhetorical. Rural and small town residents never tire of complaining how they are not getting their “fair share” of state or federal money. Rural legislators complain about money given to Indianapolis (which is particularly galling when 9 times out of 10 the state is only giving large cities like Indy taxing authority so they can tax themselves, not directly giving any cash). When’s the last time an urban legislator or leader bashed a rural area for being over-subsidized? Never AFAIK. Those who make the converse arguments are mostly always wonky types. Ask the man on the street in an urban area and they won’t know or likely care about these matters, but having spent 18 years in rural Indiana, I can tell you notion that big cities get all the money is pervasive. Not one person making such claims has any evidence to back them up, however, much less anything that would withstand scrutiny from someone interested in picking holes in methodologies.

    Also, it just so happens that I did do two independent studies of highway spending (state+federal). The first was from the mid-90’s examined every single programmed project in INDOT’s list (from an inch thick book). The other examined Gov. O’Bannon’s Crossroads 2000 plan. Neither of these showed any pervasive rural-urban discrepancy, though there was wide variance between regions. The big winner regionally was Southern Indiana, whose urban and rural areas dominated the list. Indianapolis was a below average recipient. (I can email these to you if you’d like).

    I’m glad you raise the example of Hamilton County. It’s one of the fastest growing in the nation. It’s now the 4th largest in the state and will pass Allen County to get to 3rd by 2020. INDOT has spent virtually nothing in Hamilton County for the past 20 years, nor does it show much prospect of doing so. Every state highway in Hamilton County is more or less the way it was in 1990 (and probably 1980). The huge investments there were almost all local.

    Under Major Moves, INDOT has only spent $10M there on one project (widening a short segment of SR 32). It also gave Carmel $90M for Keystone, but the bulk of that was a “fair market value” relinquishment payment. Compare the amount of freeway and state arterial capacity in Hamilton County to St. Joseph or Allen and there is no contest.

    There is a US 31 freeway upgrade proposed there at $500M, which is the least INDOT can do after 20 years of ignoring one of America’s fastest growing counties. However, unlike I-69, Hoosier Heartland, US 31 Kokomo, and US 31 Plymouth, this project hasn’t started and is backloaded into the plan. In fact, INDOT recently tried to kill it, and there’s a good chance they will kill it after some modest expenditures after Gov. Daniels leaves office in 2012.

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