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Local Revenue Hills: Evidence from Four U.S. Cities

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  • Andrew Haughwout

    (Federal Reserve Bank of New York)

  • Robert Inman

    (University of Pennsylvania and NBER)

  • Steven Craig

    (University of Houston)

  • Thomas Luce

    (University of Ameregis)

Abstract

We provide estimates of the effects and long-run elasticities of the tax base with respect to tax rates for four large U.S. cities: Houston (property taxation), Minneapolis (property taxation), New York City (property, general sales, and income taxation), and Philadelphia (property, gross receipts, and wage taxation). Results suggest that three of our cities are near the peaks of their revenue hills; Minneapolis is the exception. A significant negative effect of a balanced-budget increase in city property tax rates on the city property base is interpreted as a capitalization effect and suggests that marginal increases in city spending do not provide positive net benefits to property owners. Estimates of the effects of taxes on city employment levels for New York City and Philadelphia'the two cities for which employment series are available-show the local income and wage tax rates have significant negative effects on city employment levels. Cuts in these tax rates are likely to be an economically cost-effective way to increase city jobs. High taxes, sometimes by diminishing consumption of the taxed commodities, and sometimes by encouraging smuggling, frequently afford a smaller revenue to government than what might be drawn from more moderate taxes. (Adam Smith, The Wealth of Nations, book V, chapter II.)It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. (Alexander Hamilton, "Further Defects of the Present Constitution," Federalist Papers, No. 21.)If a tax is gradually increased from zero up to the point where it becomes prohibitive, its yield is at first nil, then increase by small stages until it reaches a maximum, after which it gradually declines until it becomes zero again. [Jules Dupuit, "On the Measurement of Utility from Public Works," reprinted in K. Arrow and Tibor Scitovsky, Readings in Welfare Economics (Homewood, IL: Richard D.Irwin, 1969).]Nor should the bbargument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction bbbbbof taxation will run a better chance than increase of balancing the budget. (John Maynard Keynes, Collected Works of John Maynard Keynes, St. Martin's Press, p. 338.) © 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 86 (2004)
Issue (Month): 2 (May)
Pages: 570-585

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Handle: RePEc:tpr:restat:v:86:y:2004:i:2:p:570-585

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Web page: http://mitpress.mit.edu/journals/

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References

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  1. Goolsbee, Austan & Maydew, Edward L., 2000. "Coveting thy neighbor's manufacturing: the dilemma of state income apportionment," Journal of Public Economics, Elsevier, vol. 75(1), pages 125-143, January.
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  7. Timothy J. Bartik, 1991. "Who Benefits from State and Local Economic Development Policies?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number wbsle.
  8. Robert Inman, 2003. "Should Philadelphia's suburbs help their central city?," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 24-26.
  9. Lars P. Feld & Gebhard Kirchgässner, 2001. "The Impact of Corporate and Personal Income Taxes on the Location of Firms and on Employment: Some Panel Evidence for the Swiss Cantons," CESifo Working Paper Series 455, CESifo Group Munich.
  10. Levitt, Steven D, 1997. "Using Electoral Cycles in Police Hiring to Estimate the Effect of Police on Crime," American Economic Review, American Economic Association, vol. 87(3), pages 270-90, June.
  11. Haughwout, Andrew F., 1998. "Aggregate Production Functions, Interregional Equilibrium, and the Measurement of Infrastructure Productivity," Journal of Urban Economics, Elsevier, vol. 44(2), pages 216-227, September.
  12. Raymond, Jennie E & Rich, Robert W, 1997. "Oil and the Macroeconomy: A Markov State-Switching Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 193-213, May.
  13. Timothy J. Bartik, 2003. "Local Economic Development Policies," Upjohn Working Papers and Journal Articles 03-91, W.E. Upjohn Institute for Employment Research.
  14. Mark, Stephen T. & McGuire, Therese J. & Papke, Leslie E., 2000. "The Influence of Taxes on Employment and Population Growth: Evidence from the Washington, D.C. Metropolitan Area," National Tax Journal, National Tax Association, vol. 53(n. 1), pages 105-24, March.
  15. Brueckner, Jan K., 1982. "A test for allocative efficiency in the local public sector," Journal of Public Economics, Elsevier, vol. 19(3), pages 311-331, December.
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  17. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2002. "Chains of Ownership, Regional Tax Competition, and Foreign Direct Investment," NBER Working Papers 9224, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. IREGUI, Ana María & Ligia Melo & Jorge Ramos, 2005. "El impuesto predial en Colombia: factores explicativos del recaudo," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO.
  2. PERALTA, Susana, 2004. "Political support for tax decentralisation," CORE Discussion Papers 2004024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Jesse Edgerton & Andrew F. Haughwout & Rae Rosen, 2004. "Revenue implications of New York City's tax system," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 10(Apr).
  4. Edward Glaeser, 2013. "A Review of Enrico Moretti's The New Geography of Jobs," Journal of Economic Literature, American Economic Association, vol. 51(3), pages 825-37, September.
  5. Dahlby, Bev, 2009. "The Marginal Cost of Public Funds and the Flypaper Effect," Working Papers 2009-17, University of Alberta, Department of Economics, revised 01 Jun 2010.
  6. Robert Inman, 2005. "Financing Cities," NBER Working Papers 11203, National Bureau of Economic Research, Inc.
  7. Edward L. Glaeser, 2012. "Urban Public Finance," NBER Working Papers 18244, National Bureau of Economic Research, Inc.
  8. Jofre-Monseny, Jordi & Solé-Ollé, Albert, 2012. "Which communities should be afraid of mobility? The effects of agglomeration economies on the sensitivity of employment location to local taxes," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 257-268.
  9. Fabio Sánchez Torres & Irina España Eljaiek & Jannet Zenteno, 2012. "Sub-national Revenue Mobilization in Latin American and Caribbean Countries: The Case of Colombia," IDB Publications 78579, Inter-American Development Bank.
  10. Stephen L. Ross, 2005. "Commentary on "Exogenous shocks and the dynamics of city growth: evidence from New York"," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 75-77.
  11. Robert Inman, 2005. "Commentary on "The geography of entrepreneurship in the New York metropolitan area"," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 55-59.
  12. Sung Kang & Laura Reese & Mark Skidmore, 2012. "The Effects of Changes in Property Tax Rates and School Spending on Residential and Business Property Value Growth," CESifo Working Paper Series 3899, CESifo Group Munich.
  13. Skidmore, Mark & Reese, Laura & Kang, Sung Hoon, 2012. "Regional analysis of property taxation, education finance reform, and property value growth," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 351-363.
  14. Benjaming Dachis & Adam Found & Peter Tomlinson, 2013. "What Gets Measured Gets Managed: The Economic Burden of Business Property Taxes," e-briefs 166, C.D. Howe Institute.
  15. Timothy J. Bartik, 2004. "Incentive Solutions," Upjohn Working Papers and Journal Articles 04-99, W.E. Upjohn Institute for Employment Research.
  16. Clément Carbonnier, 2008. "Fiscal competition between decentralized jurisdictions, theoretical and empirical evidence," THEMA Working Papers 2008-17, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  17. Stone, Joe & Bania, Neil, 2009. "Brains, drains, and roads, growth hills: complementarity between public education and infrastructure in a half-century panel of states," MPRA Paper 16173, University Library of Munich, Germany.
  18. Edward L. Glaeser & Matthew G. Resseger & Kristina Tobio, 2008. "Urban Inequality," NBER Working Papers 14419, National Bureau of Economic Research, Inc.

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