The Relationship Between City Taxes, Political Types, and City Growth

The relationship between city taxes, political types, and city growth

Christopher B. Colburn

Associate Professor

Economics Department

Old Dominion University

Norfolk, VA 23503

email: ccolburn@odu.edu

fax: 757-683-3569

and

Suganya Utanskul

Graduate Student

Economics Department

Old Dominion University

Norfolk, VA 23503

Draft copy, not for quotation without authorÐŽ¦s permission. Paper to be presented at the Public Choice Society Meetings, Baltimore, MD, March 2004.

Abstract

While there has been much research on the relationship between so called quality of life indicators and city population growth there has been supprisigly little research on the relationship to the tax burden on citizens and the growth of cities across the decimal census. This research uses a cross sectional database of all US cities with a population greater than 100 thousand (a sample of about 200) to estimate the relationship between taxes and population growth. We follow the general methodology of Glaeser and Shapiro (May 2001, Brookings Institution Survey Series) and Glaeser, Scheinman and Shleifer, (Journal of Monetary Economics, 1995). We focus on the role of taxes per capita and the distribution of the tax burden across the income distribution on city growth. Of further interest is the political structure of the cities and population. We break cities into different categories of governance by classifying cities as strong-mayor, council-manager to identify any potential effects of the political structure on economic growth. We hypothesize that in communities that have a less fragmented form of government (consistent with the strong mayor structure) that there will be greater population growth because of a closer match of city characteristics and citizen preferences in a Tiebout sense. Other variables in the model include traditional variables such as rainfall amounts and temperatures, cars per capita, the average education level, the percent of the labor force in manufacturing, and census region variables. Results indicate that, ceteris paribus, city tax increases do not seem to retard population growth and that political structure is important.

The relationship between city taxes, political types, and city growth

There were significant changes in the population of larger cities in the United States during the 1990. Traditional models of economic growth have been employed by researchers such as Glaeser and Shapiro (2001) have updated their models to see if there have been structural changes in the determents of city population growth or if older models continue to accurately predict demographic changes. One factor that has been neglected in the economic literature is the role of the political structure of the city on this growth. Possible motivations for a relationship between growth and political structure are somewhat wide ranging. For example, one may be able to identify a type principal-agent type of relationship between government decision makers and elected representatives or one may identify a Tiebout motivation in which the degree to which voters may influence decision-making is an important issue on individual and firm location decisions. Hence the focus of this paper is to investigate if such a relationship exists and, if so, identify the direction and magnitude of the relation. The paper is organized as follows. In the first section we briefly discuss the economic growth model that we are extending and put it in the context of existing literature. In the second section we discuss possible motivations for the connection between the city government structure and economic growth with particular connections to related research in Economics, Political Science, and Public Administration. In the third section the motivation for the model is presented along with estimation results and in the final section our results are summarized.

I. Population growth models

In order to address the question of the effect of city government structure on economic growth we first modify the Glaeser-Shapiro (2001) to account for the role of per capita local taxes on city population changes. The dependent variable is the growth rate in population between 2000 and 1990 and the set of independent variables include rainfall, temperature, cars and education per capita and the percentage of the workforce in manufacturing. These authors find that rainfall and a greater proportion of the workforce in manufacturing retarded city growth during the decade of the 1990 while where there was a higher educated workforce and higher temperatures and more cars city growth increased. In an earlier paper, which did not focus as much on the forecasting aspect of the population growth model, Glaeser, et al (1995) found that per capita income, variables describing the income distribution, the unemployment rate, and the before mentioned variables measuring the educational background of the population and the percentage of the workforce in manufacturing were important variables associated with city population changes.

II. Research on the role of taxes and city government political structure

In this section we will briefly discuss related previous research that have addressed, either explicitly or implicitly, the relationship between city governmental structure and the economic vitality of a city and the role of taxes and economic vitality. These papers span three different diclipines: economics, political science and public administration. We first consider taxes.

There is a large literature on the relationship between taxes and growth. Helms (1985), for example, said that the impact of taxes depended on how they were used, with expenditures on welfare, for example, having a negative impact. Benson and Johnson (1986) showed that taxes have lagged negative effects, with the adverse impact being realized