Federal Income Tax Itemization and Park Districts

•December 7, 2009 • Leave a Comment

Regardless of how you measure the figurative notion of citizen mobility between cities – individuals who would like to move, but are trapped in their current municipality for various internal and external reasons – the main problem is not the mobility of the voters, but instead the ability of the public sector to realize when a local government has failed. If this status were more clear, and local governments actually operated in a ‘municipal market,’ then other municipalities would ‘buy’ the failing municipality through merger or consolidation. Of course this comparison does not work as, unlike the private sector which seeks to buy up companies to gain advantage of differing sectors they have available to them, many municipalities do not need another police department, and to suggest so, especially internally, would be political or professional suicide.

Perhaps this type of regionalization could occur if states did not maintain strict laws that prevent annexations, mergers, and consolidations even if they are vehemently opposed by residents of failing municipalities. But this does not mean that consolidations are illogical as David Miller notes in The Regional Governing of Metropolitan America, saying, “In 1952, there were 16,778 municipalities in [the] United States. By 1997, that number had grown to 19,372 – a growth of 15.5 percent. Contrasting the growth of municipalities with that of school districts further emphasizes the limited role of municipal mergers and consolidations. In 1952 there were [67,355] (sic) school districts in [the] United States. By 1997, this number had been reduced to 13,726 (Miller, 2002, 124).” In this analysis, Miller misses the more interesting growth in the local government sector as demonstrated in the graph below:

Sources:  (U.S. Census Bureau, 2002, Tables 4&5) (U.S. Census Bureau, 2007)

While the number of municipal governments has grown sizably since 1952 to 2,685 new municipalities,  they do not compare to the growth of special purpose/district governments of 25,041 new governing bodies, three times the original 1952 amount!

What has caused this change?

The significant drop in total local governments after World War II occurred “when the proportion of the population who paid income taxes had grown dramatically, from about 5 percent when [in 1913] the [income] tax was enacted to nearly 75 percent in 1944 (Congressional Budget Office, 2008, 4),” which would likely correlate with increased attention to taxation for all levels of government. Perhaps it was at this point, when a sizable amount of people changed their focus to reducing other costs, such as the non-deducted state and local government taxes. More explicitly, the argument is that as more people take itemized deductions, the pressure to reduce the amount of local government decreases because the federal government subsidizes these expenditures, especially in the case of those under higher tax brackets. However when the standard deduction is predominantly taken, the pressure to reduce the amount of local governments increases because residents do not see their local services subsidized by the federal government. This could be an alternative explanation as to why poorer municipalities provide fewer services as their residents literally do not see the value of those services because they do not itemize.

If this were the case, political and financial pressure may have forced some local governments to merge or dissolve. As itemizing became more popular though, the political pressure on local governments has decreased, especially in more wealthy areas where itemization is more customary. This leads to more local governments (i.e. park districts) as itemizers realize increased local taxes also reduce their federal liability and increased their quality of local government service.

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Imaginationland: If Local Governments Were Taxed For Existing

•December 1, 2009 • Leave a Comment

Let’s imagine the federal government implements a ‘local service tax’ which is magically found to be constitutional.

This tax requires all local governments to pay a fee of $100,000 for services rendered by the federal government to local governments, whether it be guidance, data provision, protection, etc. The measure itself, given current local government numbers, would generate around $7.5 billion dollars in revenue for the federal government. For the following analysis, there are another two assumptions: First: the tax is based upon the amount of special districts, independent school districts, county, and municipal governments; and second: square miles of land require more government resources than do square miles of water. Below is a graph which demonstrates the responsibility of state’s local governments to pay the tax per square miles by their obligation per capita:

Click to Enlarge. Sources:  (U.S. Census Bureau, 2007), (U.S. Census Bureau, 2004), and (U.S. Census Bureau, 2009)

Considering that government expenditures are tax-exempt from the federal income tax – highest amount of tax-exempt expenditures per square mile/person represented by data points furthest from their respective axis – does it make sense that we allow states to determine their level of local services by themselves?

Further, North Dakota? Delaware? New Jersey? Why are these states so plush with local government services per square mile/person?

Are North Dakotan’s exceptionally needy?

Does Delaware or New Jersey need exceptionally green grass?

Does New Jersey have grass?

Federalism Revisited: An Anecdote on State Sales Tax Independence

•November 29, 2009 • Leave a Comment

In their example on the shopping habits between the states of Washington and Oregon, Arthur B. Laffer, Stephen Moore, and Jonathan Williams (authors of Rich States, Poor States) describe how consumer behavior is effected by the difference in retail sales tax between the two states of Washington (9% sales tax, and 0% income tax) and Oregon (0% sales tax, and 9% income tax). A study conducted by the Wall Street Journal found that, despite having measurably less money to spend, the Oregon region maintained more retail dollars earned compared to Washington. A similar type of event happened in the late 70’s when Delaware, possessing the U.S.’s highest income tax, found itself as also maintaining the highest retail sales per dollar of reported income (Laffer, Moore, and Williams, 2009, 38-39).

How does such consumer behavior affect Oregonian decision-making as the leading purveyors of the ‘smart growth’ and regional development movement? Their conscious decisions to make driving more difficult – to encourage rail use – impedes traffic in a way that planners considered fruitful, but have also proven to worsen congestion as people continue to prefer driving. This analysis, lifted from Randall O’Toole’s paper The Folly of Smart Growth, is disingenuous when the economic rationality of the consumer is brought into play. A good example of this is when O’Toole argues, “Public transit carries less than three percent of Portland-area passenger travel, yet for nearly two decades the region has invested some two-thirds of its transportation dollars into light rail and other transit rather than roads (O’Toole, 2001, 23).”

This three-percent figure erroneously implies that the Portland-area passengers as all residing in the city of Portland or the state of Oregon. From this logic O’Toole concludes that “As a result, thousands of commuters who moved to Vancouver, Wash., to escape Portland taxes and land-use regulation now face huge delays in commuting to Portland each morning (23).” Here O’Toole is arguing that those individuals, who moved to Washington to avoid the state’s income tax, but work – and likely shop – in Oregon, are being put ‘on the outs’ because of bad growth policy. The reality of the situation is that these commuters only ‘suffer’ because of bad tax policy cooperation between the two cities which has allowed them to free ride upon both Oregon and Washington’s different tax systems, it just takes them longer to get there.

In an attempt to resolve the congestion, Metro, the Portland area transit authority, suggested construction of light rail between Portland and Vancouver. Metro requested that Vancouver residents pay $480 million toward the project, but city voters soundly rejected that request. O’Toole argued that “[Vancover’s] decision is supported by a careful analysis of the economics of such projects: A typical light-rail line costs as much to build as a four-lane free- way, yet no light-rail line in the nation carries half as many people as a single lane of a typical urban freeway. Widening I-5 to three lanes for the two miles that are now bottlenecked would cost only about $10 to $20 million and would increase flow capacities by far more than would be carried on the light rail. But Metro will not allow the highway expansion until the light-rail line is fully financed (23-24)” although recently this project has actually been undertaken, although not probably in the timely fashion as Vancouver resident’s would have wanted. But as before, this is a disingenuous argument that relies on the notion that Vancouver, Washington residents should have a say in how Portland, Oregon develops despite doing their best to avoid paying for any of the public infrastructure which they use daily.

The above example is a good case for federal intervention to traditionally independent state and local sales taxes. The resulting interstate policies (or lack thereof) of the development of independent tax systems have resulted in some instances where states and municipalities play residents off of neighboring communities, usually to the detriment of the nation as a whole. The above example shows how fighting between one community’s vision of an environmentally friendly and dense urban society competes with another community’s vision: a bedroom community a quick drive away from work.

This competition leads to inefficiencies where neither community truly wins, and arguably, have both lost. Perhaps the incursion of a federal value added tax at 5%, as has been quietly discussed in Washington D.C., could discourage this type of competitive behavior by decreasing revenues for states and locals that take advantage of areas where there is little to no federal incursion upon taxation.