05 March 2007

Urban Ways and Means

The fiscal challenges faced by Denver are typical of urban central cities almost everywhere. Indeed, Denver does better than most. But, it is worth identifying some of the key issues, which I do below, before even considering improvements to the status quo, which is a matter for another post.

1. Central cities have disproportionate service burdens.

People commute to the city during the day to work, and people travel to the city in the evenings and weekends to partake of its entertainment, cultural and shopping opportunities. Relatively few people from the central city, in contrast, go to the suburbs to work, play or shop (with the exception of purchasing automobiles where sales taxes and zoning preferences have driven dealers to the urban fringe).

Also, central cities tend to have more than their share of the metropolitan area's poverty and crime. The crime is in part a product of higher actual populations during most waking hours than the city's residential population, and is in part of product of higher proverty. The poverty is in part a function of the transportation needs of the poor, and is in part a consequence of the fact that most suburbs were designed with an intent to make them unliveable for the poor -- by offering little affordable housing, by having few service providers for the poor, by having relatively little common space, and by being inaccessible to those without cars. Some suburbs, like Cherry Hills, which largely comprised of gated residential communities with expensive homes and private streets, have made this a fine art.

Thus, one of the key objectives of urban ways and means, is to find ways to directly or indirectly, tax non-residents who use urban services.

One strategy is to regionalize. Many of the Denver metropolitan area's services frequented by non-residents, like the football stadium, public transportation, and the scientific and cultural facilities in the city, are funded by regional special districts. The city's water system is also regionalized, although much of this happens by having suburban water system buy water wholesale from Denver Water and then resell it to their own citizens at retail. Similarly, most welfare programs, while administered at the county level, are financed largely at the state level. But, financing for services like jails and policing, which are driven by poverty and waking hours population, are financed locally.

This also explains the popularity of occupational taxes (which tax workers employed in the city), lodging taxes (on hotel rooms), sales taxes (paid by non-resident and resident shoppers alike), and of the Gallagher Amendment (which disproportionately taxes business that can pass on their tax burdens to those who do business with them) in places like Denver. Taxes that can only capture the residential tax base, like income taxes and property taxes, are hurt by this aspect of central city life.

Often to get decent city services, central city residents hve no choice but to pay more than their fair share for those services, subsidizing often more affluent non-residents who use those services.

Interestingly, in Denver, at least, school choice has had the reverse service burden effect. About 30% of the school aged children in Denver don't attend the city's public schools. While this has left Denver trying to carry underfilled school real estate and deprived the Denver Public Schools of state funds based on enrollment, it has also reduced the number of children whose educations must be financed in part out of the city's property tax base. Some of those school aged children attend private schools, but many attend neighboring school districts and stretch those districts' property tax funds.

2. Central cities tend to have less affluent residents.

A disproportionate share of wealthy people in most metropolitan areas live in suburbs. This strains the ability of residents to pay sales and property taxes, for example. Ability to pay taxes is closely linked to disposable income, and central cities often have a metropolitan area's lowest disposable income per capita.

3. Local taxation is characterized by a race to the bottom.

The link between tax levels and revenue is quite different at the local level, than at the federal level where the Laffer Curve is largely a myth.

Most local taxes can be avoided by doing business elsewhere or living elsewhere. If sales taxes in one locality are high, a business can locate outside the that locality and shoppers can try to shop elsewhere. If property taxes in one locality are high, there is an incentive to locate where they are cheaper. An occupational tax encourages businesses to create jobs elsewhere. Every locality needs to fund some services, so few localities can afford to offer minimal taxes. But, the race to the bottom is still there.

Some states, particularly in the Northest, face similar tax pressures, but the competitive pressure to lower taxes to avoid tax evasion isn't particularly strong in Colorado, because most urbanized areas in Colorado are inconveniently far from the state line, and because the nearest major urban centers (Phoenix, Las Vegas, Salt Lake City, Kansas City, Omaha, Wichita, Tulsa, Oklahoma City, Dallas, Sante Fe and Albuquerque) are too far away to offer tax base competition. Colorado's taxes are low, largely as a function of state politics, but many taxes wouldn't shift much economic activity out of state if they were higher.

4. Growing out of tax constraints in not an option.

Most central cities are landlocked, or close to it, surrounded by suburbs that have laid claim to neighboring territory. While infill is possible, and few central cities have been as aggressively adding new development as Denver, it is simply much harder for a central city to grow dramatically, than it is for a small town surrounded by open fields. There are real limits on how much property tax base can be increased in a central city, even with dramatically pro-growth policies.

Thus, impact fees are rarely an important potential source of revenue for a central city, and don't make sense in any case, as central cities tend to have underutilized infrastructure as a result of surbanization, rather than overtaxed infrastructure. Even when a central city needs new infrastructure, it is usually relatively cheap to add on to the existing system, as opposed to the need to start from scratch in many surban and exurban areas. For example, expanding a water system to a new urban subdivision may require only a few hundred years of pipe to link into the nearest water main. In an exurb, it may take many miles of pipe to do the same thing.

5. Many local government costs are mandated.

Many local government services are legally mandated, and like jail costs, largely outside local government control.

A single tough on crime district attorney or judge, neither of whom can be removed by the people who have to pay for jails can easily drive up jail costs, and state law sets most sentencing policy.

Local school districts have to educate every child who shows up at their door.

Local governments have to hold elections, maintain the streets, put out fires and provide public order, no matter water.

There are costs at the fringe, like parks, that can be partially restrained, and one can provide more or less police service, for example, but there are real hard and soft limits on minimum government spending.

6. Local government costs tend to rise.

Local governments are in a poor position to control costs. The long term economic trend in the United States has been for goods to drop in real prices while services grow or hold steady in real prices. Many local government services are labor dependent, in a way that makes it hard to use technology to increase productivity. Teachers, cops, fire fighters and public hospital workers aren't easily replaced with machines. Local governments, for both political reasons, and because they can't credibily threaten to relocate or close down shop if costs get too high, are frequently unionized and frequently provide pretty decent wages and benefits to their workers.

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