On July 18, 2013 Detroit filed for Chapter 9 bankruptcy, making it the largest city to file for... [+]
High crime rates, out-of-control public employee pensions, dreadful failing schools, dwindling population, long-term infrastructure deterioration -- the story of Detroit’s bankruptcy filing last month has few heroes and many villains.
The ill-conceived economic policies and real leadership vacuum, locally and at the state level, set the stage for Detroit’s failure, ultimately bringing this iconic American city to its knees. If it can happen in Detroit, we now ask, what other U.S. cities may be facing the same fiscal disaster? Chicago? Philadelphia? New York?
Recently Dave Helling of the Kansas City Star looked at the variables at play in Motor City’s economic collapse as a point of comparison for Kansas City, Mo. His conclusion? Detroit's earnings tax structure may have been a key factor in its loss of high wage earners. According to Helling, the tax incentive for workers to move to the suburbs has led to a “vicious cycle of collapse.” From 2000-2010, the metro areas with the largest declines in population (excluding New Orleans, post Hurricane Katrina) were Detroit (-25%), Cleveland (-17%), Cincinnati (-10%), Pittsburgh (-8%), and St. Louis (-8%). Each of these aforementioned cities have an earnings tax.
One state, Missouri, has taken significant steps towards dealing with the negative effect of earnings taxes.
In late 2010, they voted to require St. Louis and Kansas City to reapprove the earnings tax every five years. If the tax fails to survive an election, it will be removed over 10 years. The process led St. Louis City officials to consider alternative, less harmful methods of raising revenues.
Detroit's city income tax rate of 2.5 percent for residents and 1.5% for non-residents was the highest. In its Proposal for Creditors, Detroit clearly articulates that the City’s income tax base should be “increased through economic growth” and that lowering its earnings tax rate to “levels that are at least competitive with surrounding jurisdictions is critical to reversing the City’s crippling population and job loss.”
Last Tuesday, economist Stephen Moore cited 20 American cities that are dancing dangerously close to a fiscal cliff of their own making. As mayors and city managers take a closer look at their own deficits and consider the best fiscal policies to counteract years of revenue loss and population decline, they would do well to consider some of the studies that show the detrimental effects of taxing wages at the local, municipal level.
Recent analysis by Howard J. Wall for the Missouri-based think tank the Show-Me Institute looked at a total of 176 cities, 21 of which levy an earnings tax, over the time period between 1990 and 2000. His findings show that “an earnings-tax rate that is higher by one percentage point is associated with a population growth rate that is lower by 3.04 percentage points, and an employment growth rate that is lower by 2.32 percentage points" and “that those municipalities within the same metro area that did not levy an earnings tax, enjoyed faster population growth.”
This new evidence supports Detroit’s plan to cut earnings taxes and to rely on economic growth through other more productive development. It also should be used as a guide for city leaders across the country as they face their own economic crises.
