NCPA - National Center for Policy Analysis

Excessive Taxes Throttle Cities

April 12, 2004

Taxes are necessary for society. However, excessive taxation hurts the private sector. A new report from the National Bureau of Economic Research analyzes four major metropolitan areas and measures the problems of too many taxes.

The authors found that in New York and Philadelphia, tax increases reduce city jobs:

  • Because of tax hikes, New York City lost 330,000 jobs from 1970 to 2001.
  • Losses would have been worse, but Mayor Guiliani's 1994 tax cuts saved 160,000 jobs.
  • Similarly, Philadelphia lost 173,000 jobs between 1971 and 2001 because of increases in city wage tax rates.

The authors note that Guiliani's tax cuts did result in less tax revenue. However, the additional jobs offer an important compensating benefit. The end result is a smaller public sector, but a larger and arguably more productive private city economy. This superior economy can produce additional tax revenue.

The report concludes that cities' revenue capacity is limited by the mobility of its residents and businesses. Tax increases, unmatched by tax-financed compensating benefits for taxpayers - whether property owners, consumers, or firms - will drive those taxpayers from the city. Property values will fall, business sales decline, and the city's tax base shrinks. To protect city economies, a dollar of taxes paid must be matched by at least a dollar of public service benefits.

Source: Les Picker, "Local Revenue Hills: Evidence From Four U.S. Cities," NBER Digest, February 2004; based upon: Andrew Haughwout, Robert Inman, Steven Craig, and Thomas Luce, "Local Revenue Hills: Evidence From Four U.S. Cities," National Bureau of Economic Research, Working Paper, No. 9686, May 2003.

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