Pur Autre Vie

I'm not wrong, I'm just an asshole

Tuesday, April 28, 2015

Local Taxation and Justice

A note on federalism and local governance in the United States.

Federal income taxes are actually quite progressive, even if you include payroll taxes (Medicare and Social Security).  But state and local taxes are not.  And the thing I want to note is that this is no accident, that our country is structurally inclined to punish poor people and to under-provide public goods and services.  This is because (A) almost all public services are provided at the local level and paid for with local taxes, (B) local governments are engaged in a brutal competition for tax revenue, and (C) at the margin, rich people are very attractive citizens (and poor people unattractive citizens) if taxes are at all progressive.

The first point here is taxpayer mobility.  There aren't many people who will move out of the United States in response to an increase in taxes.  (Anyway where would they move?  Canada?  Taxpayer mobility is a bigger problem in Europe where there are little asshole jurisdictions that welcome rich people from the real countries.)  But it is almost trivially easy for a lot of people to move to another town or county or even state.  Many big metro areas are near state borders—New York City is easily reachable from New Jersey and (to a slightly lesser degree) Connecticut.  Kansas City actually straddles the border between Missouri and Kansas.  The District of Columbia is obviously highly accessible from Virginia and Maryland.  The Quad Cities offer several towns in each state, so you can have your pick.  And even for cities like Los Angeles and Seattle, which are pretty far from the closest neighboring state, there are suburbs that are designed to make commuting as easy as possible.

The second point is that in tax-and-spending terms, rich people are desirable citizens, and the more redistributive the taxes, the more desirable they are.  (Please note that I'm not arguing rich people are desirable citizens/neighbors in any other way.)  Rich people tend to pay a lot in taxes and they are not particularly heavy users of public services.  But in a competitive equilibrium, redistribution at the local level tends to be unsustainable—a town that imposes a more regressive tax scheme will disproportionately attract rich people, while a town that imposes progressive taxes will disproportionately drive them away.  (Likewise, poor people are attracted to localities that provide good public services without imposing big tax burdens on poor people, which is to say, localities with highly progressive taxes.)  And as we observed above, our system is designed so that rich people can move within a metro area to escape taxes much more easily than they can move to a new country.  The result is that in equilibrium, local taxes tend to be regressive and public services tend to be under-provided.

This isn't always true.  In areas where poor people can be excluded, rich people are happy to tax themselves heavily and spend the revenue on public goods.  This is why many public school districts in Westchester County (where exclusionary zoning keeps the poor people away) are extremely well-funded.  But in any area that is economically diverse, rich people will generally prefer to obtain their goods and services through the market (private schools, doormen, security guards, private country clubs) rather than through the government (public schools, police, parks).

The point here is that there are structural barriers to progressive taxation and well-funded public sectors, so that even in very liberal cities, the public sector tends to be under-funded and the taxes tend to be regressive.  (Again, there are partial exceptions.  New York City has a bit of a captive rich population, and it extracts a reasonable amount of taxes from it.  Meanwhile New York doesn't tax groceries, for instance, which is nice for poor people.  But in a way New York proves my point, because even in such a liberal, economically diverse jurisdiction with a relatively immobile rich population, the public sector is under-funded and poor people are over-taxed.)

By the way, a little evidence for my argument.  Both St. Louis and Baltimore seceded from their counties at a time when rich people tended to live in the city and the counties were relatively poor.  With the advent of commuting by car, both of those cities lost their affluent populations to surrounding areas, and they had no way of taxing them.  By contrast, Chicago never seceded from Cook County, and today it can use the county to tax its affluent suburbs.  It is no coincidence that St. Louis and Baltimore are two of the poorest and most crime-ridden cities in the United States.

A couple of policy implications.  First, I think there is a good argument for increasing federal income taxes and then block-granting it to states and local governments on a per capita basis.  This idea is usually associated with conservatives, but I think it should have quite a bit of appeal to liberals.  It would shift the overall tax burden in a progressive direction and it would significantly dampen tax competition among local governments.  Well-financed city governments don't have to skimp on important public services, and they don't have to squeeze the poor.  (They can, but they don't have to.)

The second policy implication is a bit more complicated.  Basically, we should question whether it makes sense to make it easy to commute from suburbs into cities.  This is complicated for at least two reasons:  (1) it makes a lot of sense for people to commute by rail, and on a big-picture level it makes sense to enable a certain amount of train-based sprawl while facilitating a dense central business district, and (2) if you make it hard to travel into a city, it is possible that employers will move to the suburbs rather than rich people moving into the city.  Nevertheless, it's important to bear in mind that the more money you spend providing easy transportation into a city, the more tax competition you are engendering.  In fact I think a likely partial explanation for the decline and re-emergence of New York City is that there was a large "shock" in the form of easier transportation (both by rail and by car), spurring a big move to the suburbs, but that eventually the spare capacity in these transportation systems got used up, commutes got shitty, and people were motivated to move back into the city.  Not every city will be able to clog up the transportation systems linking it to its suburbs, and so a lot of cities will find it much harder to spark a revival.

So far I've avoided linking these ideas specifically to what is going on in Baltimore and Ferguson, because clearly there are a lot of other factors in play there.  But I do think people should consider these structural factors as well.  Baltimore isn't shitty for poor people merely because of racism, rotten police culture, etc.  It is also shitty for poor people because even a local government with the best intentions is fighting an uphill battle just to be halfway decent to its poor residents.  This isn't about the intentions of individual political leaders, it's about the economic and political geography of the country.  It's about the architecture of our system.  If you want to change the world, attend to its fundamental structure.


Blogger Sarang said...

Another factor amplifying these effects is that a lot of affluent people park their wealth in real estate, so the size of their nest egg relies on prevailing property values. If your net worth depends on your house being located in a good school district that is a powerful reason to oppose equalizing school funding, regardless of whether the money *for the schools* comes out of your pocket.

10:01 AM  
Blogger James said...

I think I agree, but this is a complicated policy question. Someone is going to own the housing stock, so there will always be a constituency for policies that protect land values. Removing inducements to homeownership might create more renters, but then the landlords would have roughly the same incentives as the homeowners in the status quo.

You may say that current policy encourages people to over-consume housing, and so there would just be less of it (in dollar terms) if we adopted a more neutral policy stance. That's possible, but a lot of the value of real estate comes from its location, not the structure itself. So it's not clear to me that we would see a very different picture if policy were different.

Note that rich people are not necessarily wielding political power in my narrative. They're voting with their feet. Rich people obviously have disproportionate political influence, but I'm not sure they have enough to frustrate school-funding reform if middle-class people thought there was something in it for them.

For what it's worth, my understanding is that in Oregon the state provides public school funding and it "follows the student" (meaning it's allocated to schools based on enrollment). But what I don't know about education policy could fill a library.

8:49 PM  
Blogger Sarang said...

I am skeptical that in a renting equilibrium the landlords (presumably mostly multi-unit owners who do this for a living) would work quite the same way. For one thing they are likely to be a lot more diversified, b'se homeowners are maximally non-diversified and therefore desperate. For another, there would be a lot fewer of them so they would not have the clout of middle-class families that have sunk their savings into a house in a good school district.

10:45 AM  

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