Brookings-Wharton Papers on Urban Affairs 2002 (2002) ix-xvi
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URBAN AREAS FACE daunting economic challenges that have increased in scope in recent years. At the same time, cities provide exciting opportunities for growth and revitalization. The interplay of these challenges and opportunities creates important tasks for policymakers and researchers. The Brookings-Wharton Papers on Urban Affairs aim to address these issues by providing cutting-edge, accessible research on issues unique to urban areas, as well as on broad economic and policy topics that have special applications in an urban setting.
This volume of BWPUA contains papers and discussant comments from a conference held at the Brookings Institution on October 25-26, 2001. The papers are divided into two groups. A symposium of three papers examines metropolitan tax and fiscal policy. Stephen Calabrese, Glenn Cassidy, and Dennis Epple model and evaluate the effects of political mergers between cities and suburbs. Robert Inman and Andrew Haughwout examine the links between the economic vitality of cities and suburbs and ask whether suburban communities could make themselves better off by subsidizing central cities. Teresa Garcia-Milà and Therese McGuire present a new theoretical argument for firm-specific tax incentives for industry relocation and apply their model to Boeing's recent decision to move its headquarters to Chicago. In the other papers in the volume, Jacob Vigdor explores the impact of alternative measures of gentrification on lower income city residents; and Ingrid Gould Ellen, Katherine O'Regan, Amy Ellen Schwartz, and Leanna Stiefel explore the varying experiences of immigrant students in the New York City public school system. [End Page ix]
Symposium on Metropolitan Tax and Fiscal Policy
Cities attract businesses and residents by providing high-quality amenities. But providing those amenities requires funding, and higher tax burdens increase incentives for city residents and firms to depart for lower tax locations. Balancing these considerations is an essential problem in urban public finance. The income disparity between most large central cities and their relatively wealthier suburbs makes these issues even more difficult and politically sensitive. In addition, the potential effectiveness of many fiscal options is unknown, and the connection between economic effectiveness and political feasibility is sometimes overlooked.
Large metropolitan areas in the United States are characterized by a very large number of local governments, with many urban areas containing more than 100 separate municipalities. The fragmentation of local government has led to concerns regarding the distribution of government services and the efficiency with which these services are provided. Central city mayors and some analysts have advocated political and fiscal consolidation, but annexation of developed suburbs has rarely occurred.
Stephen Calabrese, Glenn Cassidy, and Dennis Epple model voting behavior in multiple municipalities to evaluate the effects of mergers. Voters, who vary only in income, choose their preferred level of public services and redistribution, and the level and type of tax levied. They also choose their residential location based on these policies. In equilibrium, majority rule determines tax, public service, and redistribution policy; each municipality has a balanced budget; no one wants to move; and the housing market clears. The policy favored by the median-income voter will always be adopted. The model produces results consistent with observed patterns in cities: although both large and small municipalities provide public goods, redistribution occurs almost exclusively in large central cities. Small suburban municipalities depend primarily on property tax revenues to finance public services, but central cities use both income and property taxes. The policy choices result in income stratification across the metropolitan region. Low-income households with a preference for redistribution are more likely to locate in the central city, whereas wealthy households will choose suburbs with high levels of public service provision and less redistribution. [End Page x]
The stratification of municipalities by income implies that mergers are generally not politically viable. Residents of a poorer municipality, such as a central city, will support a merger with a wealthier suburb to obtain higher public good provision and redistribution, with lower overall tax rates. But residents of the wealthier suburb will oppose consolidation to avoid falling property values, reduced public good...