Wednesday, December 2, 2009

Recession Creates a Captive Audience of Taxpayers

Copyright, The New York Times Company

Recent experience with municipal sales and income taxation serves as a reminder that competition among governments benefits their “customers” — us.

Thanks to a County Board vote in early 2008 that doubled the Cook County portion of Chicago’s sales tax, Chicago attained the highest sales tax rate in the United States — 10.25 percent, passing up Memphis with its 9.25 percent rate. (The total sales tax in New York City is now 8.875 percent, after a half-percentage-point increase over the summer.)

The Cook County Board’s president, Todd H. Stroger, told voters that the county badly needed the revenue. Republicans attributed the increase to county government control by “tax and spend” Democrats, but both explanations raise the real question: Why was 2008 suddenly the time to have such a high sales-tax rate?
Governments almost always “need” more revenue, and Democrats have dominated county politics for a long time. For some reason, the board president and his supporters once thought that a sales-tax rate less than 10 percent for Chicago was O.K.

Changing migration patterns are part of the explanation. Over the years, Cook County had been competing with nearby areas for citizens. Joliet, Naperville and Aurora are each less than 50 miles away and have grown toward a combined one-half million people. Since 2006, however, the rate of migration out of Cook County has dropped 17 percent.

The recent migration pattern is quite different from what it was during the 1980-82 recession, when Cook County lost population at a particularly high rate.

This recession’s housing crisis has created a significant obstacle to those who might move out of Cook County and other large metropolitan areas: It’s difficult to sell a house. Until housing markets get significantly better, it looks as if Cook County will have a captive audience.

With a captive audience, governments can tax at higher rates with less concern for an exodus by taxpayers, and that’s why Chicago’s 10.25 percent tax has not been created the out-migration that it would have five years ago.

The sales tax is not the only public policy that responds to competition among government institutions.

Suburban public schools are thought to be more efficient because they are compared by parents and homeowners with schools in nearby districts (see the Stanford professor Caroline Hoxby’s research on school competition and school efficiency). Perhaps the data will someday show that the housing crisis was associated with worse results from public schools, too, thanks to this same audience captivity.

It appears that yet another legacy of this recession may be to render municipal taxpayers as second-class citizens.


Milton Recht said...

Al Hirschman, "Exit, Voice and Loyalty."

There is a trade-off between emigration (exiting), and political dissent (voice). As more people can emigrate, there is little motivation for them to use politics to protest the local government's actions. Those that remain are the most captive and most tolerant of local government policies.

As the populace loses its ability to exit a locality with unpleasant governmental actions, there will be increased reliance on political protests and dissent and increased motivation to vote out of office those who promote undesirable actions.

If mobility does not increase soon, I think you will see just the opposite of your prognosis. More voices and protests will be heard at the local government level. More unhappy citizens will be engaged in local politics and motivated to vote. Local governments will be forced to undo many of the burdens they placed on their citizens.

People have cut expenses under their control, such as autos, gasoline, restaurants, clothes, vacations, travel, credit card debt, etc. People already cut consumption expenditures. The next available phase of cuts will be local government expenditures to curtail the continuing increase in local taxes and fees.

Sheng said...

A side implication is that if Chinese government allows for free internal migration and land sales, rural disputes and protests would be much less.