The Tax Bias Against Cities
Not that long ago, I couldn’t imagine a more boring topic than taxes. Then I saw this documentary about how regressive state taxes in Alabama were enriching the wealthy at the expense of the state’s poorest residents. The documentary featured people that literally did not have indoor plumbing but were carrying the state government on their backs while many wealthy residents of the state were entirely exempt from paying state taxes. This is because Alabama has a regressive state income tax policy that lets residents write off their federal income taxes from their state tax bill. Essentially, if your income (and by extension your federal income taxes) are high enough, you’re completely off the hook for state taxes.
Ever since, I’ve been interested in tax policy (thanks, PBS!). Especially when I found out my home state of Ohio participates in some of these tax policies that unfairly burden the poor.
The Brookings Institution’s “Restoring Prosperity: The State Role in Revitalizing America’s Older Industrial Cities,” does a really nice job summarizing how state and federal policies are exacerbating the decline of American inner-cities and aggravating the plight of the urban poor. I would really recommend reading this whole study if you have a few hours. Here are a few of the highlights:
State-Level Tax Policy Favors Suburbs and Rural Areas:
- Michigan and Pennsylvania both make the top ten list of states with the most regressive tax systems.
- Ohio and Pennsylvania are among 31 states that do not offer an earned income tax credit, to ensure that those who are paid the lowest wages get to keep a greater protion of their income.
- In 2002, Michigan asked its poorest residents, the bottom 20 percent of earners, to pay almost two and a half times as great a share of their earnings as the top 1 percent.
- While Michigan’s central cities make up 18 percent of the working-age population and one-quarter of dislocated workers, inner cities received just 6 percent if business tax credits, 8 percent of road improvement dollars and 15 percent of job-training matching funds, between 2001 and 2004.
- Many states, including Ohio, maintain laws require municipalities pay for their road maintenance but allow unincorportated areas to shift the burden to the county and state.
Federal Level Programs Favor the Suburbs:
- Studies find that transit funding is less secure than highway, is subject to intense competition and requires complicated and convoluted application processes.
- Homeownership deductibles also favor suburbanites, who receive as much as three-fourths of all subsidies.
Given the abysmal state of our cities however, some leaders are starting to take steps to reverse the tide.
Some Signs of Progress:
- Michigan’s Gov. Jennifer Granholm has made investments in cities an explicit part of the state’s economic development plan, with millions of dollars targeted toward brownfields remediation, regional planning, and local infrastructure improvements.
- In 2005, Granholm also launched “Cities of Promise,” a five-year initiative that requires 18 state agencies to work collaboratively with eight of the state’s most distressed cities—including Detroit, Saginaw, and Flint—to reduce poverty, spark economic development and investment, and improve blighted neighborhoods in these communities.In
- In Pennsylvania, the Rendell administration is focusing on the links between economic growth, a skilled workforce, and targeted government investments that at once protect open space, shore up fading towns and cities, and clean up polluted sites.
- Pennsylvania has created a $625 million bond fund, for example, to support the state’s Growing Greener II program, which will be targeted directly towards environmental projects, and downtown and community revitalization.