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

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. LOCAL REVENUE HILLS: EVIDENCE FROM FOUR U.S. CITIESAndrew Haughwout, Robert Inman, Steven Craig, and Thomas Luce* 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 ...

Wage Taxes and Commuters—the Case of Pennsylvania

“…These t statistics indicate that statistically the wage tax rate does not have a significant effect on a locality's net labour inflow. This result conforms to the finding of Haughwout et al (2003) that for the city of Philadelphia, its wage tax base per resident shows little sensitivity to changes in the city's weighted average wage tax rate on residents and non-residents. However, the result contrasts with the rationale of much theoretical tax competition literature, which maintains that an increase in the tax on a mobile production factor causes an outflow of that factor, generating a positive externality for other regions.…”

The marginal cost of public funds and the flypaper effect

“…However, one well-known study of the Laffer curves, or "revenue hills", for four large US cities by Haughwout et al (2004) indicates that the MCFs for property taxes in 2001 were 1.56 in Minneapolis, 5.00 in Philadelphia, 10.00 in New York, and undefined in Houston because it was on the downward sloping section of its Laffer curve for property tax revenue. 8 Given these high MCFs, we would expect that these cities would exhibit large flypaper effects.…”

Solving the Problems of Economic Development Incentives

“…These larger effects make sense because individual jurisdictions within a metropolitan area are closer substitutes for one another than different states are for one another, as jurisdictions within the same metropolitan area offer more similar access to markets and inputs. The research is mixed on whether business tax cuts for large central cities have significant effects on business location (Bartik 1991a(Bartik , 1992Haughwout et al 2003).…”