Posted by
John R. LaPlante on Wednesday, August 30, 2006 9:11:44 AM
Cities that are at the core of a metropolitan area often face the challenges of having an older population and infrastructure and a more-expensive workforce. But they should resist the urge to simply seek more revenue by implementing (or increasing) a tax on earnings.
The Show-Me Institute, based in Saint Louis, Missouri, is one of the newer members of the State Policy Network. Its first full-length report, How an Earnings Tax Harms Cities Like St. Louis and Kansas City (PDF reader required) compares metropolitan areas across the country.
Not all cities in a region grow at the same rate, so what distinguishes faster-growing core cities from slower-growth ones? Economists have long known that what you tax, you get less of. Economic theory says that when cities impose higher tax rates, they will get less--fewer workers and less income—compared with cities that don’t.
Fiscal policy analyst and economics professor Joseph H. Haslag looked at the tax rates and earnings growth of 101 core cities and their suburbs across the country. Cities with earnings taxes, it turns out, have grow slower relative to their suburbs than cities that don’t.
So much for the idea that taxes don’t matter. Though there are some advantages in being located in the core city of a metropolitan area, individuals and businesses do respond to tax rates.