Why can't this logic go in gdip_format_string?
Because not all of its callers should be affected (GdipMeasureCharacterRanges is one of them).
How not? If the padding is there when drawing the whole string, it affects the positions of individual characters.
Many sources on the net suggest using GdipMeasureCharacterRanges to avoid extra padding added by GdipMeasureString.
My understanding is that MeasureCharacterRanges does not include the padding in its measurements, because it measures individual characters, but it still accounts for the padding. That means that if you measure a character range with padding applied, the resulting rectangle will be shifted by the amount of the padding, but the padding will be outside the rectangle.
This makes it possible to avoid the padding when drawing effects such as a background highlight behind some text. Returning a measurement that doesn't reflect reality as you suggest would not be a useful behavior, as the measurement would simply lead to drawing something in the wrong place.