Table 8

Few would argue that taxes and spending have no effect on a city's economy. The question is: how important are taxes and spending in explaining city economic performance? One way to examine this question is to com-pare the relative levels of taxing and spending in cities with booming economies against those levels in cities with declining economies.

In a 1992 study for the Cato Institute, we devised an index for assessing the economic well-being of the largest U.S. cities.[9] We then correlated this index to taxing and spending behavior in these cities. We found that high taxes and spending affect economic growth of cities in a significantly negative fashion. For example, we found that for every $1.00 of per capita expenditures (excluding dollars spent on anti-poverty programs, education, and health care) in the highest growth cities, the shrinking cities spend $1.71. As a result, in 1990 a typical family of four living in one of the shrinking cities paid $1,100 per year more in taxes than it would have had it lived in one of the highest growth cities. We now address the question of whether this inverse relationship between taxes and spending and economic growth is also observable in Michigan cities.

To assess the economic performance of Michigan's 11 largest cities we examined the same six measures of economic health that we used in our above-mentioned national study. The measures used are 1980-90 changes in population, employment, per capita money income, and poverty rate; and the 1990 levels of per capita money income and the poverty rate. These figures were used to calculate an economic performance index which is shown in Table 8.[10] Figures 4-9 show the performance of the 11 Michigan cities on each economic measure.

The economic performance index for the period 1980-1990 shows that six cities experienced economic growth and five experienced economic decline. We therefore divide the cities into two groups: growth cities and declining cities. The five cities with negative scores on the economic performance index are: Flint, Detroit, Dearborn, Lansing, and Kalamazoo. The six growth cities are: Sterling Heights, Ann Arbor, Livonia, Grand Rapids, Westland, and Warren. Table 9 ranks the cities by their economic performance index score and shows how 1990 taxes and spending differed in the high-growth and low-growth groups.

  • The declining cities collected roughly 65 percent more revenue per resident from their citizens in 1990 than did the growth cities. See Figure 10.

  • The five declining cities spent $420 more per resident in 1990 than did the growth cities. See Figure 11.

  • The five declining cities also were the five highest spending and five of the six highest tax cities.

Table 9 also presents a measure of "tax effort" for the 11 Michigan cities.[11] The tax effort index compares the tax rates, rather than revenues, for cities. A tax effort of 1.00 is the average tax effort for cities in Michigan. Hence, a tax effort of 2.0 would mean that the city has twice the tax burden of the average city. The tax effort data further confirm the conclusion that taxes are very high in Michigan's declining cities. Of the five declining cities, only Dearborn's tax effort is even close to the state-wide average. Tax rates are more than 50 percent above the Michigan average in Flint, Kalamazoo, and Lansing. Incredibly, Detroit's tax effort is a six times above the average. Herein lies a major source of economic decline.

As Table 10 indicates, taxes and spending were significant-ly higher in the declining cities for every one of the six individual economic growth measures examined. For example:

  • The cities with the fastest growth in poverty collected general tax revenues of $711 per resident. The slow poverty growth cities took in one-third less.

  • The six cities with the highest 1990 poverty rates spent $922 per person in 1990, while the more affluent cities spent only $538. As noted at the outset, these spending figures do not include spending on health, education, or welfare, so it cannot be argued that these spending differences are being caused by large amounts of anti-poverty spending.

  • A family of four in the six cities that lost population in the 1980s would have seen roughly $2,500 of its income sent off to city hall, while such a family in the growing cities would have given up less than $2,000. In other words, the family could save more than $500 a year by living in one of Michigan's growth cities rather than one of its declining cities.

In sum, Michigan cities with booming economies tend to have much lower levels of taxes and spending than those in decline. This is similar to the national pattern with cities. Few would argue that the quality of municipal services in the declining cities of Michigan is twice as high as in the prosperous cities. Most would say just the opposite – that services are better in the low-cost cities.

The critical policy question is this: are the higher levels of taxing and spending in the declining cities contributing to that decline or are they a consequence of that decline? Most urban theorists say that it is the latter. The traditional argument is that low-growth cities spend more than high-growth cities because their needs are greater. They claim that such cities must spend more for anti-poverty programs, homeless assistance, drug rehabilitation, crime control, and job training, among other things. Since declining cities have less wealth and fewer workers and businesses to pay the costs of those programs, those cities have to impose higher tax burdens on their residents and businesses just to raise the same amount of revenue as high-growth cities do. In sum, higher spending and taxes in low-growth cities are alleged to be purely symptomatic of urban decline.

This study and others cast some doubt on that claim.[12] We believe that conventional wisdom does not tell the whole story. We contend that the evidence shows that high taxes and spending are both cause and consequence of urban decline. Remember, city public welfare spending is not included in the spending figures in this study, so they cannot be driving low-growth cities' expenditures upwards. Furthermore, if urban decline necessitates higher city spending, is it not unrealistic to expect that higher spending to bring about more acceptable conditions? In other words, if more spending is the cure, why do the big spending cities continue their spiraling decline?

One way to test whether higher taxes and spending are a cure or a cause of urban decline is to look at the levels of taxes and spending in the high-growth and low-growth cities at the beginning of the period of analysis, 1980. Table 11 does just that, using the economic performance index score described earlier.

  • The five cities with the worst economic performance in the 1980s – Kalamazoo, Lansing, Dearborn, Detroit, and Flint – had per capita levels of own-source revenues (in 1990 dollars) of $745 in 1980. The six high-growth cities took in only half that much, $363 per resident.

  • Per capita spending in the declining cities in 1980 was also twice as high as in the booming cities, at $1,057 vs. $532.

Looking at the various measures of economic growth individually shows the same correlation between high spending and urban decline. As Table 12 indicates, for every economic variable used, the spending and taxes at the beginning of the period were higher in the cities that subsequently declined than in those that grew.

  • In the cities that subsequently had population growth in the 1980s, average per capita city tax revenue in 1980 was $395 (in 1990 dollars). In the cities that lost population the 1980 level was more than 50 percent higher at $654.

  • The six cities with 1990 per capita money income greater than $15,000 spent $585 per resident in 1980, while the poorer cities spent nearly twice that much at $993.

  • The four cities with the biggest increases in poverty rates – over 45 percent – took in $802 in own-source general revenue per capita in 1980. The cities with slower poverty growth brought in less than half that at $384.

If big spending were the cure for urban decline, Michigan cities such as Detroit and Flint would be thriving. Instead they continue to tax and spend at levels well above those of other more prosperous cities in Michigan, and sadly they continue to experience the pain of economic stagnation.

While we can confidently assert that high levels of taxes and spending have yet to prove to be the cure for urban de-cline, it is not as clear whether or not they are a cause of the decline. One way to approach this question is to rank the cities by 1980 levels of taxes and spending and see how the high spending and low spending cities compare.

As Table 13 shows, the five cities with the highest 1980 levels of per capita spending and own-source revenues were the very same five cities that had negative scores on the economic performance index. Table 14 shows how these two groups of cities compared on the various measures of economic performance.

  • The five high-tax cities saw their populations drop by 6 percent, while those with lower taxes had no population loss.

  • The low-spending cities had an employment increase of 13 percent. The high-spending cities saw an increase that was less than half that size. See Figure 12.

  • Per capita money income went down by 5 percent in real terms in the high-tax cities, but it rose by 9 percent in the low-tax cities. See Figure 13.

  • The cities that spent the most in 1980 saw their poverty rates rise by 58 percent during the 1980s, while poverty in the cities with lower spending went up by only 21 percent.

  • In 1990, per capita money income in 1980's high-tax cities was roughly $12,000. In the low-tax cities it was over $16,000.

  • In the cities that spent the most in 1980, roughly one out of every four residents were below the poverty line in 1990. In the low-spending cities it was less than one in 10.

The data shows convincingly that cities in Michigan, like cities elsewhere, cannot tax and spend their way to prosperity. In fact, it is those cities that have high tax burdens and excessive spending that are experiencing the worst economic despair.

If taxing and spending are not the keys to economic prosperity, what are Michigan's city leaders to do?