How Declining Cities Can Reverse Their Fortunes

Commentary, Municipal Government, Neil Reynolds

In 1980, metropolitan Austin (Texas) had a population of 590,000, metropolitan Syracuse (New York) a population of 643,000. By 2007, Austin’s population had grown by more than one million; Syracuse’s had scarcely grown at all. More precisely, Austin’s population grew by 170.1 per cent, Syracuse’s by 0.2 per cent; Austin’s employment grew by 222.1 per cent, Syracuse’s by 24.7 per cent; and Austin’s real personal income grew by 329.6 per cent, Syracuse’s by 45.3 per cent.

Why the difference? Why exuberant growth in Austin and stagnation in Syracuse? Florida economist Dean Stansel, who analyzed the growth records of the 100 most populous U.S. metropolitan cities across the past 30 years, says economic growth tracks state and municipal tax rates. The lower the rates, the greater the growth. Austin’s state-local tax burden (expressed as a percentage of personal income) averaged 9.2 per cent, Syracuse’s 12.6 per cent – a difference of 33 per cent.

Prof. Stansel’s paper, published in the Cato Journal, explores the statistical relationships between tax rates and growth from both ends of the telescope: Did low taxes produce high growth, or did high growth produce low taxes? From either perspective, he reached the same conclusion. “The data for the largest 100 metro areas show that areas with low taxes do indeed tend to grow faster than those with high taxes. … The [same data] show that areas with high growth tend to have lower taxes than those with low growth.”

Further: “Population growth … was three times higher in the 10 lowest-tax metro areas than in the 10 highest-tax areas. … Employment growth was more than two and a half times higher and real personal income growth was twice as high.”

Comparing the 10 lowest-taxed metro areas with the 10 highest, Prof. Stansel found that population grew, on average, by 64 per cent in the lowest-taxed areas (versus 21 per cent in the highest); that employment grew, on average, by 108 per cent in the lowest-taxed areas (versus 40 per cent in the highest); and that real personal income grew by 157 per cent in the lowest-taxed areas (versus 75 per cent in the highest).

The big winners in this three-decade competition were such low-tax cities as Raleigh and Charlotte (in North Carolina), Orlando, Tampa and St. Petersburg (in Florida) and San Antonio, Houston and Austin (in Texas). The losers were such high-tax cities as Detroit (in Michigan), Buffalo, Syracuse and Rochester (in New York) and Cleveland and Toledo (in Ohio). In most cases, it was the local tax burden (rather than the state tax burden) that was decisive. The tax burden in Miami, for example, is 14 per cent higher than in Tampa, where employment growth was twice as fast.

Prof. Stansel’s paper nicely coincides with California demographer Joel Kotkin’s essay in Forbes magazine on the great American migration of the early 21st century – on the triumph once again of suburbs over inner-city condos as the preferred destination of the young and the restless: the “cohort” between 25 and 34. These young families were once thought to have found happiness in sophisticated, high-density urban ghettos. For the past decade, however, they’ve moved in progressively greater numbers to the suburbs of southern cities. (Between 2000 and 2010, Houston attracted 174,000 migrants from this cohort alone – and New York City lost 200,000.)

Why the flight from condos? For one thing, Mr. Kotkin says, it’s because young families still want the things that young families have always wanted: single-family homes (with backyard lawns) in low-rise neighbourhoods. For another, they wanted low taxes.

It’s impossible, of course, to compare the tax burdens of specific U.S. and Canadian cities – especially in tough times. Blocked from running deficits, states are obliged to cut services, often arbitrarily. Provinces are under no such restraint; they simply borrow. Texas, for example, has a state debt of $30-billion (U.S.); Ontario has a provincial debt of $220-billion. The Canadian way is easier for now. But today’s government debt is tomorrow’s taxation.

Nevertheless, cities compete in the same way that provinces and nations compete. Toronto and Montreal, two of Canada’s highest-taxed cities in two of its highest-taxed provinces, should take note. Immigration aside, these two cities have stopped growing. People do vote with their feet.