Taxes and the Life and Death of Great American Cities

In the current edition of the Cato Journal, economist Dean Stansel looks back on three decades of population changes in American cities. Not surprisingly given its 25 percent population implosion between 2000 and 2010, Detroit is a poster child for cities in decline, and is featured in the article’s opening sentence.

Stansel reports a persistent relationship between tax burdens and growth in cities, states and nations. He focuses on the evidence for this provided by population changes in 100 metropolitan areas across the United States.

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In the 10 highest taxed areas in the United States, state and local tax burdens equal 12.4 percent of personal income, compared to 8.3 percent in the 10 lowest-tax areas. Between 1980 and 2007, the highest-tax metropolitan areas experienced population growth of just 21.3 percent, compared to 64.4 percent in the lowest-tax ones.

In the high-tax zones, over those 27 years total employment grew a bit more than 40 percent,  and personal income increased around 76 percent after adjusting for inflation. In contrast, the number of jobs grew by 108 percent in the lowest tax areas, and incomes increased by an astounding 157 percent.

Although other factors certainly played a role, it’s extremely unlikely that the relationship between tax burdens and economic growth is mere coincidence. An example of other factors would be fast-growing Austin, Texas, which also benefits from that state’s right-to-work law, which prohibits making union membership a condition of employment for individuals.

Still, the academic literature does suggest that taxation plays a critical role in migration, economic growth and development. The Mackinac Center has documented Michigan-centric evidence for the relationship (examples here and here).

In 1993, the Center examined the growth and tax relationship in Michigan’s 11 largest cities during the 1980s. This study, “A Prosperity Agenda for Michigan Cities,” was written by Stansel himself, with co-author Stephen Moore and a preface by David Sowerby. It found that the five of these 11 cities that decreased in population had tax burdens 65 percent higher than the six cities where population grew.

Correlation is not necessarily causation, but local and state policymakers would be foolish to ignore the relationship between taxation and the growth or decline of populations, wealth and the overall well-being of residents.