Cato Policy Analysis No. 188 February 22, 1993

Policy Analysis

The Myth of America Underfunded Cities

by Stephen Moore and Dean Stansel

Stephen Moore is director of fiscal policy studies and Dean Stansel is a research assistant at the Cato Institute.

Executive Summary

For more than a quarter century Americans have been voting with their feet against the economic policies and social conditions of the inner cities. Since 1965, 15 of the largest 25 U.S. cities have lost 4 million people, while the total U.S. population has risen by 60 million.(1) The exodus is no longer just "white flight"; the 1990 census reveals that minorities are now leaving the cities in record numbers.(2)

In recent years the departure of businesses, jobs, and middle-income families from the old central cities has begun to resemble a stampede. For example, since the late 1970s more than 50 Fortune 500 company headquarters have fled New York City. A stunning 370,000 jobs left the city between 1989 and 1992, and another 130,000 were expected to disappear by the end of 1992.(3) Cleveland, Detroit, Philadelphia, St. Louis, and other major U.S. cities are also suffering from severe out-migration of capital and people. Those once- mighty industrial centers are becoming hollow cores of poverty and crime.

Ever since the Los Angeles riots and looting, the urban lobbyists--including the mayors, the public employee unions, urban scholars, and many members of Congress--have been arguing that the inner cities were victims of federal neglect under Ronald Reagan and George Bush.(4) "There was, quite literally, a massive federal disinvestment in the cities in the 1980s," says congressional delegate Eleanor Holmes Norton of Washington, D.C.(5) To revive the cities, the U.S. Conference of Mayors is asking for $35 billion in new federal funds--a "Marshall Plan for the cities."(6)

Unfortunately, the federal government has already tried the equivalent of some 25 Marshall plans to revive the cities.(7) Since 1965 the federal government has spent an estimated $2.5 trillion on the War on Poverty and urban aid. (That figure includes all spending on welfare, Medicaid, housing, education, job training, and infrastructure and direct aid to cities.) Economist Walter Williams has calculated that that is enough money to purchase all the assets of the Fortune 500 companies plus all of the farmland in the United States.(8) But it has not spurred urban revival. In 1992 federal aid to states and cities rose to $150 billion. Adjusted for inflation, that is the largest amount of federal intergovernmental aid ever extended--hardly a "massive disinvestment."

The budgets of Cleveland, Detroit, Philadelphia, New York, St. Louis, and other large central cities have not been shrinking; they have been rapidly expanding for decades. In constant 1990 dollars, local governments spent, on average, $435 per resident in 1950, $571 in 1965, and $1,004 in 1990. The largest cities saw an even faster budget rise. In real dollars, New York City's budget nearly tripled from $13 billion in 1965 to $37 billion in 1990. Philadelphia, another nearly bankrupt city, allowed its budget to rise by 125 percent between 1965 and 1990--from $1.6 billion to $3.5 billion. During the same time period, the city lost 20 percent of its population. In short, 25 years of doubling and even tripling city budgets have not prevented urban bleeding.

Not all U.S. cities are in decline. Among the nation's largest urban areas there are dozens of cities--many on the West Coast, in the Sunbelt, and in the Southeast--that have been booming financially and economically for at least the past 20 years. Las Vegas, Nevada; Phoenix, Arizona; Arling- ton and Austin, Texas; Sacramento and San Diego, California; Raleigh and Charlotte, North Carolina; and Jacksonville, Florida, all have rapidly rising incomes, populations, and employment and low poverty and crime rates.

The key policy question addressed in this study is, What do growth cities--Phoenix, Raleigh, and San Diego, for example--do differently from shrinking cities--such as Buffalo, Cleveland, and Detroit? The answer is found, at least partially, in the fiscal policies of the cities. Using Bureau of the Census city finance data from 1965, 1980, and 1990 for the 76 largest cities, we find significant and consistent patterns of higher spending and taxes in the low-growth cities than in the high-growth cities. Table 1 highlights the difference between the fiscal policies of the 10 cities with the greatest growth in population in the 1980s and the 10 largest urban population losers. The data in Table 1 support the following findings.

Table 1

Spending and Taxes in the 10 Highest Growth and 10 Lowest Growth Cities, 1980 and 1990

City Percentage Change in Population, 1980-90 City Tax Revenue per Capita, 1980 Expenditures* per Capita, 1980 Expenditures* as Percentage of Money Income, 1980 City Tax Revenue per Capita, 1990 Expenditures* per Capita, 1990 Expenditures* as Percentage of Money Income, 1990 City Employees per 10,000 Residents, 1990
Highest growth cities
Mesa 89% $153 $547 5% $149 $649 6% 81
Las Vegas 79% $252 $547 4% $213 $829 7% 74
Arlington 63% $212 $385 3% $323 $580 4% 68
Fresno 62% $296 $645 6% $279 $514 5% 82
Santa Ana 44% $236 $446 4% $329 $526 5% 69
Stockton 42% $284 $860 8% $305 $574 6% 75
Aurora 40% $332 $501 4% $369 $668 5% 84
Raleigh 38% $249 $560 5% $322 $734 5% 131
Austin 35% $250 $529 5% $365 $924 8% 215
Sacramento 34% $309 $748 6% $388 $732 6% 115
Average 53% $257 $577 5% $304 $673 6% 99
Lowest growth cities
Newark -16% $508 $843 12% $307 $1,117 15% 184
Detroit -15% $476 $1,300 13% $507 $1,328 14% 215
Pittsburgh -13% $433 $953 9% $601 $936 9% 159
St. Louis† -12% $687 $1,102 12% $725 $1,205 12% 195
Cleveland -12% $386 $937 10% $530 $959 11% 175
New Orleans† -11% $396 $1,047 10% $547 $1,275 14% 197
Louisville -9% $377 $815 8% $524 $1,144 12% 168
Buffalo -8% $439 $1,106 12% $376 $1,083 12% 400
Richmond† -7% $882 $1,092 10% $1,189 $1,1502 12% 503
Chicago -7% $389 $756 7% $574 $971 9% 149
Average -11% $497 $995 10% $588 $1,152 12% 235

*Do not include expenditures on health, education, and welfare.

†County-type area without any county government.

* For every $1.00 of per capita expenditures (excluding dollars spent on anti-poverty programs, education, and health care) in the highest growth cities, the shrinking cities spend $1.71. In 1990 expenditures in the highest growth cities averaged $673 per person, or 6 percent of personal income, versus $1,152, or 12 percent of personal income, in the shrinking cities--up from the 1980 figures of $257, or 5 percent of personal income, in the highest growth cities and $497, or 10 percent of personal income, in the shrinking cities.

* In 1990 a typical family of four living in one of the shrinking cities paid $1,100 per year more in taxes than it would have had it lived in one of the highest growth cities. A family of four paid $2,352 in taxes in the shrinking cities and $1,216 in the highest growth cities.

* Shrinking cities' bureaucracies are twice as large as those of growth cities. In 1990 the highest growth cities had, on average, 99 city employees per 10,000 residents; the shrinking cities had 235.

* Cities with high spending and taxes in 1980 lost population in the 1980s; cities with low spending and taxes gained population. High spending and taxes are a cause, not just a consequence, of urban decline. The fastest growing cities in the 1980s had very low average spending--$577 per resident, or 5 percent of personal income--at the start of the period. The cities with the most severe population losses had 1980 average spending of $995 per resident, or 10 percent of personal income. Taxes were $257 per capita, on average, in the highest growth cities and $497 in the shrinking cities in 1980 (see Figure 1).

Expenditures are high and rising in large central cities primarily because their governments generally have above-average unit costs for educating children, collecting garbage, building roads, policing neighborhoods, and providing other basic services.(9) For example, in 1988 the shrinking cities spent roughly $4,950 per pupil on education, whereas the high-growth cities spent $3,600. The $1,350 cost differential cannot be explained by better schools in places such as Detroit and Newark.

Figure 1

The influence of municipal employee unions also contributes to higher costs in declining central cities. Compensation for unionized local employees tends to be roughly 30 percent above wages for comparably skilled private-sector workers.(10) In New York City the average school janitor is paid $57,000 a year.(11) In Philadelphia the average municipal employee receives more than $50,000 a year in salary and benefits. According to the Census Bureau, cities with populations over 500,000 pay their mostly unionized workers more than 50 percent more than do cities with populations under 75,000, whose workforces are less likely to be unionized. In short, thriving cities are places where costs are lower, bureaucracies are smaller, and services are better.

Some city officials are beginning to recognize economic reality. The newly elected Democratic mayor of Philadelphia, Edward Rendell, is challenging the entrenched municipal unions and other spending constituencies with a budget plan that calls for $1.1 billion in savings over five years. He has spurned more federal aid as the poison that produced Philadelphia's near-insolvency last year. Meanwhile, Chicago mayor Richard M. Daley and Indianapolis mayor Stephen Goldsmith have contracted out dozens of services to private providers and have slowed the growth of massive, bloated budgets to a crawl.

The decline of America's major cities is not inevita- ble. They can and should be saved. For generations they have served as the nation's centers, not only of industrial might, but of culture, diversity, and intellect. Through an aggressive agenda of budget control, tax reduction, privatization, and deregulation, America's declining cities can rise again in prominence and prosperity.

The Shrinking Cities

The riots in Los Angeles in the spring of 1992 dramatized the social and economic deterioration of many central cities. At a rally held in Washington a month after those riots, New York mayor David Dinkins aptly described the inner cities as places of "only grief and despair."(12) Almost all quality-of-life indicators for many of the fastest shrinking cities confirm that gloomy assessment. Consider these examples:

* The 1990 census data reveal that an appalling 48 percent of all Detroit households are now headed by a single female. In the Motor City the father is quite literally an endangered species.

* Newark has a lower real per capita income today than it did in 1969.

* Cleveland had nearly 1 million residents in the 1950s; now it has fewer than 500,000 people left.

* The Chicago area has averaged 10,000 manufacturing job losses annually for the past 15 years. A recent Chicago tribune headline said it all: "Factory Flight Hits Record Pace."(13)

* St. Louis has lost more than two of every five jobs it had in 1965.

* Philadelphia has a four-year $1 billion budget deficit. Its bond rating has sunk so low that it is effectively blocked from municipal capital markets and must borrow through a state oversight agency.

* Washington, D.C., which had 489 killings in 1991, has been dubbed the "murder capital of the world."

* In Baltimore, Maryland, 56 percent of black males between the ages of 18 and 35 were in trouble with the law in 1991, according to a new study by the National Center on Institutions and Alternatives.(14)

The root cause of almost all the social, economic, and fiscal problems of America's depressed cities is the steady flight of businesses and middle and upper income families from the inner cities. In the past quarter century, 15 major cities combined have lost 3.8 million people (see Table 2) and roughly the same number of jobs. No longer is the problem just white flight. The 1990 census data suggest that middle-income minorities are now fleeing to the suburbs in record numbers.(15)

Using a formula of four economic factors--population growth, job growth, per capita income growth, and growth of the percentage of female-headed households--we determined that the following 10 cities experienced the most rapid growth from 1965 to 1990.

1. Mesa, Arizona
2. Arlington, Texas
3. Aurora, Colorado
4. San Jose, California
5. Lexington, Kentucky
6. Colorado Springs, Colorado
7. Jacksonville, Florida
8. Raleigh, North Carolina
9. Charlotte, North Carolina
10. Santa Ana, California

Table 2

America's Shrinking Cities

City 1990 Population (Thousands) Estimated 1965 Population (Thousands) Change, 1965-90 (Thousands)
New York 7,323 7,839 -516
Chicago 2,874 3,460 -676
Philadelphia 1,586 1,976 -390
Detroit 1,028 1,592 -564
Baltimore 736 922 -186
Cleveland 506 813 -307
Washington, D.C. 607 760 -153
Milwaukee 628 729 -101
San Francisco 724 728 -4
St. Louis 397 686 -289
Boston 574 669 -95
New Orleans 497 610 -113
Pittsburgh 370 562 -192
Denver 468 504 -36
Buffalo 328 498 -170
15-city total 18,556 22,348 -3,792
Total U.S. population 249,975 191,313 +58,662

The following 10 cities declined the fastest during that time.

1. Detroit, Michigan
2. Rochester, New York
3. Cleveland, Ohio
4. Buffalo, New York
5. Milwaukee, Wisconsin
6. Louisville, Kentucky
7. Akron, Ohio
8. Chicago, Illinois
9. St. Louis, Missouri
10. Philadelphia, Pennsylvania

Table 3 presents a number of indicators of economic health from 1965 to 1990 for each of the 77 largest U.S. cities.(16)

The urban crisis is clearly not shared by all cities. The declines in the most depressed cities are matched by impressive gains in the highest growth cities. Raleigh, for example, has seen its population almost double, its jobs more than double, and its real per capita income grow by more than 40 percent since the mid-1960s. The wide diversity in the economic performance of central cities suggests that the individual policies of each city play an important role in explaining urban growth and decline.

Table 3

Indicators of Economic Growth of Major U.S. Cities

City Estimated Change in Population, 1965-90 Change in Number of Residents Employed, 1960-89 Increase in per Capita Money Income, 1969-87 Percentage-Point Increase in Female-headed Households, 1970-90
Highest Growth
Mesa 495% 805% 26% 16
Arlington 288% 675% 19% 18
Aurora 260% N/A 31% 20
San Jose 136% 410% 30% 15
Lexington* 164% 437% 36% N/A
Colorado Springs 173% 455% 29% 17
Jacksonville* 74% 289% 30% 16
Raleigh 92% 215% 44% 21
Charlotte 79% 156% 38% 18
Santa Ana 129% 294% 10% 12
Las Vegas 172% 336% 10% 15
Anaheim 97% 333% 17% 15
Riverside 102% 313% 15% 16
Nashville* 71% 292% 35% 22
Phoenix 92% 252% 23% 18
Austin 112% 276% 28% 21
Albuquerque 73% 191% 25% 18
San Diego 75% 197% 19% 17
Fresno 136% 152% 15% 18
El Paso 72% 152% 8% 14
San Antonio 51% 123% 17% 17
Boston* -14% 1% 36% 20
Corpus Christi 38% 95% 17% 17
Wichita 14% 61% 24% 19
St. Petersburg 20% 133% 23% 21
Mobile 2% 21% 30% 21
Tampa 1% 73% 28% 21
Los Angeles 32% 60% 11% 16
Houston 50% 157% 15% 20
Norfolk* -15% 9% 16% 16
Tucson 70% 175% 14% 22
Oklahoma City 28% 71% 15% 19
Jackson 32% 75% 22% 22
Dallas 32% 110% 18% 21
Baton Rouge* 38% 105% 20% 23
Tulsa 24% 79% 19% 21
Shreveport 15% 47% 23% 22
Omaha 4% 45% 23% 22
Sacramento 65% 106% 11% 21
Fort Worth 19% 86% 11% 19
Miami 14% 50% 13% 20
San Francisco* -1% 16% 16% 20
Columbus 25% 77% 15% 22
Indianapolis* 21% 103% 13% 22
Washington, D.C.* -20% -12% 24% 23
Memphis 9% 67% 20% 24
Long Beach 22% 50% 6% 20
Richmond* -13% 17% 25% 26
Denver* -7% 24% 19% 23
Kansas City -11% 19% 17% 23
Des Moines -6% 35% 14% 22
Minneapolis -20% -7% 21% 24
Seattle 5% 42% 15% 24
St. Paul -13% 9% 19% 24
Portland 16% 33% 8% 22
Stockton 115% 157% 3% N/A
Jersey City -15% -16% 7% 20
New York* -7% -6% 13% 23
Atlanta -20% 6% 20% 26
Toledo -5% 38% 8% 23
New Orleans* -19% -5% 12% 23
Oakland 2% 27% 9% 24
Pittsburgh -34% -26% 16% 25
Baltimore -20% -11% 12% 24
Birmingham -17% -2% 13% 25
Newark -30% -29% -1% 19
Cincinnati -24% 1% 16% 26
Philadelphia* -20% -12% 7% 23
St. Louis* -42% -41% 15% 25
Chicago -20% -11% 3% 23
Akron -21% -5% 6% 24
Louisville -28% -6% 8% 25
Lowest Growth
Milwaukee -14% 0% 7% 27
Buffalo -34% -31% 5% 26
Cleveland -38% -33% -1% 24
Rochester -25% -14% 4% 28
Detroit -35% -33% -2% 30
77-city average 7% 33% 17% 21

*County-type area without any county government.

Are Cities Responsible for Their Own Fates?

In conventional analyses of the urban crisis, cities are portrayed primarily as victims of national trends, federal mandates, and other conditions beyond their control. Factors blamed include the recession, the Reagan budget cuts, suburbanization, the decline in manufacturing, the rise of the automobile, immigration, an aging infrastructure, racism, AIDS, homelessness, urban gangs, guns, and drugs. Each of those factors can place considerable strain on municipal budgets, yet city officials are impotent to combat them.

There is some truth to the conventional analyses. The recent recession is painful evidence that no city is immune from the impact of national economic conditions and policies. For example, from the 1950s through the 1980s most California cities enjoyed spectacular rates of growth. California was widely considered recession proof. Yet the present recession has had a devastating impact on California localities--many of which are at the top of the list of growth cities. One-third of all job losses in the past two years has occurred in California.(17) Another example is the impact that wide fluctuations in international oil prices in the 1970s and 1980s had on the economies and budgets of Texas cities.

Unquestionably, there are regional factors at play in determining the relative rates of growth of cities. Most of the declining cities in our survey are the once-mighty industrial centers in the Northeast and the Midwest--the rustbelt. Most of the growth cities are in the Sunbelt, on the West Coast, and in the Southeast. A related factor that tends to correlate with the rate of economic growth of a city is its age: older cities tend to experience less economic growth, a phenomenon that is often attributed to the aging infrastructures of those cities.

Still, the fact that for long periods of time some cities have been flourishing as others have been deteriorating suggests that the self-imposed policies of cities play an important role in determining their economic fates. Regional factors cannot fully explain the different growth rates of cities. Although the South has been a high-growth region, three of the fastest declining cities--Birmingham, Louisville, and New Orleans--are in that region.

Even within states we find significant differences in the economic performance of cities. Why is Oakland a declining city but Santa Ana a growing city? Why is Arlington doing so much better than Fort Worth or Colorado Springs better than Denver? How does one explain the fact that the eighth fastest growing city, Lexington, and the ninth fastest declining city, Louisville, are both in Kentucky?

We believe an important factor is that their spending and taxing policies are very different. Growth cities have pro-growth fiscal policies; declining cities have antigrowth fiscal policies.

How Taxes and Spending Affect Urban Economies

The Census Bureau publishes annual data on city finances, including the overall level of taxing and spending, the types of taxes levied, and the composition of spending. It also publishes data on public employment and salaries. We use data from 1965, 1970, 1980, and 1990. All of the data we draw on are for central cities, not metropolitan areas.

There are several potential problems in comparing spending and taxes by city. The major one is that the division of responsibilities for program funding among state government, counties, school districts, and cities differs from state to state. For example, in some states the responsibility for funding welfare assistance is delegated to the counties. In others such assistance is paid for by the state government. And in still others the cities pay for those programs. Another complication is that some cities are not part of independent counties, and so the city government funds all the activities of the county.(18) By contrast, most cities are part of larger counties, which means that the costs of funding services such as hospitals and courts in the inner cities are spread to the suburbs. Finally, in some cities school funding is handled by school districts or in large part by the state, not the city, government.

To control for such factors we exclude from our overall spending variables (unless otherwise indicated) city expenditures on health care, hospitalization, welfare, and education (hereafter referred to as health, education, and welfare).(19) Moreover, we exclude from tax and revenue data all intergovernmental revenues received from the state or the federal government. Finally, we exclude Honolulu, Orlando, and Virginia Beach from our sample because of unique fiscal situations in those cities that make intercity comparisons especially problematic. We include Washington, D.C., only when we compare combined city and state spending or taxes. So we work with a sample of 76 of the 80 largest cities.

A final potential problem with comparing city growth rates over time is that city borders change. Many cities, such as Portland, Oregon, have aggressively annexed neighboring suburbs. In the case of Portland, annexation has been a major source of population growth. However, we believe that annexation is as much a consequence of a city's economic success as it is an explanation of that success. In many cases localities have merged with central cities because it has been in their economic interests to do so. By the same token, more and more localities are now attempting to secede from declining central cities because their economic policies, such as tax rates and service costs, have grown too burdensome.

In this study we develop an index of American cities' fiscal health in 1990. The index is based on six factors: per capita city expenditures, city expenditures as a share of personal income, growth in per capita expenditures, combined state and city per capita tax burden, city tax revenues as a share of personal income, and city employees per 10,000 residents. The 10 cities with the lowest taxes and spending are

1. Arlington, Texas,
2. Jackson, Mississippi,
3. Fresno, California,
4. Mesa, Arizona,
5. Stockton, California,
6. El Paso, Texas,
7. Corpus Christi, Texas,
8. Santa Ana, California,
9. Omaha, Nebraska, and
10. Wichita, Kansas.

The 10 cities with the highest spending and taxes are

1. New York, New York,
2. Richmond, Virginia,
3. San Francisco, California,
4. Baton Rouge, Louisiana,
5. Minneapolis, Minnesota,
6. Baltimore, Maryland,
7. Denver, Colorado,
8. Norfolk, Virginia,
9. Boston, Massachusetts, and
10. Philadelphia, Pennsylvania.

Table 4 shows the spending and taxing levels, as well as the relative ranking, of all 76 cities in our sample. As the table indicates, the cities differ substantially in their spending and taxing. Expenditures in the lowest spending cities average roughly $550 per person, or 5 percent of personal income, whereas expenditures in the highest spending cities average almost three times more: $1,500 per person, or 13 percent of personal income.

We examine how spending and taxing affect the economic performance of cities. To gauge cities' economic performance, we examine the measures of economic growth described in the preceding section: population growth, job growth, per capita income growth, and growth of the percentage of female-headed households. Our standard method of analysis is to divide the cities into five groupings--highest growth cities, high-growth cities, average-growth cities, low- growth cities, and lowest growth cities. We compare the taxing and spending policies of the five groups.

Table 4

Taxes and Spending of Major U.S. Cities

City Expenditures* per Capita, 1990 Expenditures* as Percentage of Money Income, 1990 Increase in per Capita Expenditures,* 1965-90 State & City Own-Source Revenue per Capita†, 1990 City Tax Revenue as Percentage of Money Income, 1990 City Employees per 10,000 Residents, 1990
Very low taxes and spending
Arlington‡ $580 4% 28% $1,967 2% 68
Jackson $549 5% 1% $1,966 2% 110
Fresno $514 5% -29% $2,922 3% 82
Mesa‡ $649 6% 32% $2,394 1% 81
Stockton $574 6% 15% $2,973 3% 75
El Paso $430 5% 144% $1,866 3% 96
Corpus Christi $517 5% 105% $1,940 3% 123
Santa Ana $526 5% 58% $2,920 3% 69
Omaha $631 5% 110% $2,040 3% 86
Low taxes and spending
Wichita $663 5% 127% $2,360 2% 89
Aurora‡ $668 5% 115% $2,491 3% 84
Memphis $542 5% 50% $1,820 2% 355
Mobile $637 6% 54% $2,425 4% 126
Oklahoma City $706 6% 71% $2,537 3% 107
Las Vegas $829 7% 41% $3,129 2% 74
Dallas $764 6% 85% $2,210 4% 148
Colorado Springs $560 5% 120% $2,618 2% 209
Lexingtonठ$855 7% 28% $2,612 3% 149
Raleigh $734 5% 163% $2,299 2% 131
Sacramento $732 6% 65% $3,103 3% 115
Riverside $793 7% 66% $3,147 3% 100
Toledo $711 7% 118% $2,757 3% 91
St. Petersburg $926 8% 75% $2,380 3% 130
Columbus $736 7% 77% $2,826 4% 122
San Diego $779 6% 103% $3,244 2% 93
Milwaukee $862 8% 55% $2,701 2% 143
Akron $767 7% 63% $2,878 4% 131
Shreveport $718 7% 121% $2,424 4% 136
San Jose $869 6% 104% $3,113 3% 76
Average taxes and spending
Portland $843 7% 109% $2,616 4% 111
Fort Worth $850 8% 131% $2,159 4% 123
Houston $820 7% 170% $2,201 4% 120
San Antonio $711 8% 201% $1,908 2% 143
Charlotte $1,084 8% 113% $2,491 2% 126
Miami $902 9% 105% $2,214 5% 119
Tucson $862 8% 151% $2,559 3% 123
Des Moines $921 8% 151% $2,716 3% 119
Pittsburgh $936 9% 69% $2,572 5% 159
Los Angeles $921 7% 101% $3,325 4% 147
Jersey City $905 9% 77% $2,926 4% 154
Anaheim $974 7% 136% $3,268 3% 138
Kansas City $983
8% 111% $2,545 6% 148
Chicago $971 9% 117% $2,553 5% 149
Austin $924 8% 182% $2,449 3% 215
High taxes and spending
Seattle $1,037 7% 84% $3,660 4% 218
Phoenix $1,166 9% 190% $2,649 3% 121
Tulsa $966 8% 253% $2,837 3% 120
Jacksonville§ $1,027 9% 228% $2,370 3% 170
Nashville§ $982 8% 50% $2,796 7% 350
Cleveland $959 11% 87% $2,962 6% 175
Indianapolis§ $937 8% 260% $2,493 4% 175
Long Beach $1,328 10% 93% $3,549 3% 132
Tampa $1,278 12% 128% $2,519 4% 153
Birmingham $950 11% 225% $2,457 6% 145
Cincinnati $1,218 11% 109% $3,241 5% 192
Louisville $1,144 12% 179% $2,526 5% 168
Oakland $1,286 11% 161% $3,520 4% 124
Newark $1,117 15% 112% $2,968 4% 184
St. Paul $1,416 11% 165% $3,463 3% 133
Albuquerque $1,267 11% 205% $3,386 3% 178
St. Louis§ $1,205 12% 139% $2,578 7% 195
Buffalo $1,083 12% 99% $3,456 4% 400
Atlanta $1,429 12% 162% $2,884 5% 210
New Orleans§ $1,275 14% 144% $2,845 6% 197
Detroit $1,328 14% 164% $2,889 5% 215
Very high taxes and spending
Rochester $1,196 11% 100% $3,936 6% 391
Philadelphia§ $1,341 13% 119% $3,095 10% 204
Boston§ $1,454 11% 68% $3,774 8% 364
Norfolk§ $1,187 12% 164% $3,085 8% 402
Denver§ $1,501 12% 233% $3,440 6% 279
Baltimore§ $1,288 13% 135% $3,271 9% 404
Minneapolis $1,659 13% 279% $3,626 4% 173
Baton Rouge§ $1,438 14% 233% $3,229 7% 256
San Francisco§ $1,636 11% 133% $4,655 8% 356
Richmond§ $1,502 12% 189% $3,558 10% 503
New York§ $2,058 16% 143% $5,547 16% 623
76-city average $975 8% 113% $2,862 4% 176

*Do not include expenditures on health, education, and welfare.

†Excludes revenues received from federal government.

‡1970 figures are used in place of 1965 figures.

§County-type area without any county government.

Table 5

Relationship between 1965-90 Population Growth and Size of City Government

Population Growth Expenditures* per Capita, 1990 Real Increase in per Capita Expenditures,* 1965-90 City Tax Revenue per Capita, 1990 Expenditures* as Percentage of Money Income, 1990 City Employees per 10,000 Residents, 1990 Monthly City Payroll per Capita, 1990
Highest growth cities over 100% growth (n=12) $695 $232 $314 6% 107 $27
High-growth cities 50% to 100% growth (n=13) $890 $515 $371 8% 146 $33
Average-growth cities 10% to 19% growth (n=16) $860 $453 $414 7% 134 $31
Low-growth cities -15% to 9% growth (n=18) $1,142 $652 $670 9% 243 $61
Lowest growth cities over 15% shrinkage (n=18) $1,169 $662 $577 12% 217 $51

*Do not include expenditures on health, education, and welfare.

Population Growth

Figure 2 [Omitted]

The best indication of the livability of a city is probably whether people are moving to or out of it. When people moved from East Germany to West Germany, they were voting with their feet against the policies of the Eastern bloc. So it is in the United States. Table 5 shows the results for six key spending and tax variables. The cities that had large population losses from 1965 to 1990 spend, tax, and hire city workers at roughly twice the rates of the cities that had large population gains. For example, the highest growth cities (those with population gains of 100 percent or more) spend 6 percent of personal income, whereas the lowest growth cities (those that lost at least 15 percent of their populations) spend 12 percent of personal income (see Figure 2). The highest growth cities had 107 employees per 10,000 residents versus 217 in the lowest growth cities. Those findings suggest that cities with high taxes and service costs are driving people away.

Job Growth

Just as population changes are a measure of how people are voting with their feet, employment changes are a measure of how businesses are voting with their feet. Firms and capital that create jobs tend to migrate to areas with pro-growth and pro-business climates. Again, we find that very high taxes and spending are characteristic of cities that lost the most jobs between 1960 and 1989 (Table 6). Per capita spending is roughly 50 percent higher in the lowest growth cities than in the cities with the greatest growth in employment, as shown in Figure 3. The cities with the lowest growth in employment spend almost $1.40 for every $1.00 of municipal expenditures in the highest growth cities. It would appear that high taxes and spending are driving businesses and jobs away from shrinking cities.

Female-Headed Households

One indication of poverty and family disintegration in an area is the percentage of female-headed households.(20) Fatherless homes are about eight times more likely to be poor than are intact families.(21) Moreover, children who grow up in fatherless homes are much more likely to commit crimes and engage in other socially unacceptable behavior of the type that plagues inner cities.

Between 1970 and 1990 the percentage of female-headed households rose at an alarming pace nationwide. The largest increases occurred in the inner cities, where Census Bureau data indicate an increase from about 15 to 35 percent in fatherless homes. We find that those cities with the largest increase in female-headed households between 1970 and 1990 have spending and taxes that are at least 50 percent higher than those of cities with small increases in female- headed households (Table 7). (Remember that we exclude the costs of most anti-poverty programs from this analysis.)

Table 6

Relationship between 1960-89 Job Growth and Size of City Government in 1990
Job Growth Expenditures* per Capita, 1990 Expenditures* as Percentage of Money Income, 1990 City Tax Revenue as Percentage of Money Income, 1990 Monthly City Payroll per Capita, 1990
Highest growth cities over 200% growth (n=14) $819 7% 3% $33
High-growth cities 100% to 200% growth (n=14) $846 7% 3% $29
Average-growth cities 30% to 99% growth (n=18) $823 7% 3% $34
Low-growth cities -10% to 29% growth (n=18) $1,276 11% 6% $58
Lowest growth cities over 10% shrinkage (n=12) $1,121 12% 6% $59

*Do not include expenditures on health, education, and welfare.

Figure 3 [Omitted]

Table 7

Relationship between 1970-90 Growth in Percentage of Female-Headed Households and Size of City Government
Percentage-Point Growth of Female-Headed Households Expenditures* per Capita, 1990 Real Increase in per Capita Expenditures,* 1965-90 City Tax Revenue per Capita, 1990 City Employees per 10,000 Residents, 1990
Highest poverty growth cities under 18 percentage-point increase (n=14) $769 $394 $338 137
High poverty growth cities 18 to 20 percentage-point increase (n=16) $979 $484 $445 150
Average poverty growth cities 21 to 22 percentage-point increase (n=17) $832 $428 $420 145
Low poverty growth cities 23 to 24 percentage-point increase (n=17) $1,202 $700 $680 229
Lowest poverty growth cities over 24 percentage-point increase (n=11) $1,169 $684 $591 247

*Do not include expenditures on health, education, and welfare.

Per Capita Income Growth

The growth of per capita income is one of the best measures of the economic growth rate of a city and the standard of living of its residents. From 1969 to 1987 there was a huge difference in the growth of per capita income among cities. For example, Raleigh, Charlotte, Boston, and Nashville all had per capita income growth of more than 35 percent, whereas Detroit, Cleveland, and Newark all had negative income growth. The cities with the lowest growth in income (less than 10 percent) are characterized by per capita spending and taxes that are about 10 percent higher than those of cities with the highest growth in income (more than 25 percent). As a share of personal income, spending and taxes are about 25 percent higher in cities with the lowest growth. The results are shown in Table 8. In sum, cities with slow growth in income are characterized by spending and taxes that are slightly higher than those of high-growth cities.

Table 8

Relationship between 1969-87 Real Growth in per Capita Money Income and Size of City Government
Real Growth in per Capita Money Income, 1969-87 Expenditures* per Capita, 1990 Expenditures* as Percentage of Money Income, 1990 City Tax Revenue per Capita, 1990 City Tax Revenue as Percentage of Money Income, 1990
Highest growth cities over 25% real growth (n=13) $902 7% $443 4%
High-growth cities 20% to 25% real growth (n=13) $1,041 9% $456 4%
Average-growth cities 15% to 19% real growth (n=21) $951 8% $501 4%
Low-growth cities 10% to 14% real growth (n=13) $1,004 9% $581 5%
Lowest growth cities under 10% real growth (n=17) $991 10% $458 5%

*Do not include expenditures on health, education, and welfare.

Do High Taxes and Spending Cause Urban Decline?

The urban lobby and urban scholars invariably argue that low-growth cities spend more than high-growth cities because their needs are greater.(22) Poor cities have to meet increased demands for anti-poverty spending, subsidized child care, homeless assistance, drug abatement and rehabilitation, crime control, job training, and so on. And because declining cities have less wealth and fewer workers and businesses to pay the cost of those programs, those cities have to impose higher tax burdens on their residents and businesses to raise the same amount of revenue wealthy and prospering cities do. In sum, higher spending and taxes in low-growth cities are allegedly not a cause but only a consequence of urban decline.

The data presented in the preceding section, which show that high spending and high taxes are characteristic of cities in decline, would support either possibility. (However, the data also indicate that high city expenditures and more money are not a cure for urban decline.) We next ex plore whether spending and tax levels at the beginning of each period of analysis are related to rates of economic growth and well-being later in the period. If cities with high spending and taxes in 1970, for example, had large increases in poverty from 1970 to 1990, the initial high spending and taxes clearly were not a consequence of the subsequent poverty. Indeed, that would be strong evidence that high spending and taxes contributed to poverty.

Table 9

Relationship between 1965 City Taxes and Spending and Subsequent Economic Growth
Measure of Economic Growth Expenditures* per Capita, 1965 Own-Source Revenue per Capita†, 1965 City Income Taxes‡ per Capita, 1965
Population Growth, 1965-90
Highest growth cities (>100%) (n=12) $463 $369 $0
Lowest growth cities (<-15%) (n=18) $507 $530 $47
Job growth, 1960-89
Highest growth cities (>200%) (n=14) $435 $361 $0
Lowest growth cities (<-10%) (n=12) $533 $605 $47
Increase in female-headed households, 1970-90
Lowest growth cities (<18% pts.) (n=14) $375 $328 $0
Highest growth cities (>24% pts.) (n=11) $510 $518 $56
Real per capita money income growth, 1969-87
Highest growth cities (>25%) (n=13) $468 $414 $0
Lowest growth cities (<10%) (n=17) $487 $520 $32

*Do not include expenditures on health, education, and welfare.

†Excludes intergovernmental revenue from state and federal government.

‡City income taxes are a component of total city own-source revenues.

Table 9 indicates that the levels of city spending and taxes in 1965 are negatively correlated with subsequent rates of urban economic progress. That is reflected in four of the measures of economic growth we examined: population change from 1965 to 1990, employment change from 1960 to 1990, percentage-point change in female-headed households from 1970 to 1990, and change in per capita income from 1969 to 1987. For example, Figure 4 shows that cities that had high growth in employment had per capita tax revenues of $361 in 1965, whereas cities with low growth in employment had per capita tax revenues of $605. Per capita income growth is the only economic measure for which the relationship appears to be weak. Spending and taxes were typically 25 to 100 percent higher in the lowest growth cities.

Figure 4 [Omitted]

The negative relationship also holds true with even greater force for the 1980s. Cities with high spending and taxes in 1980 lost population in the 1980s; cities with low taxes and spending in 1980 gained substantial population in the 1980s. The scattergram in Figure 5 shows that negative relationship; city expenditures are plotted as a share of money income in 1980 versus population growth from 1980 to 1990. Cities with high taxes and spending experienced urban decline.

City Growth and Expenditures on Education

Figure 5 [Omitted]

Education is a major budget item that should not cost much more (on a per student basis) in a low-growth city than in a high-growth city. If per student education costs were uniform across cities, we would expect to find higher per pupil expenditures in growing and affluent areas if only because the residents have more money to devote to the schools.(23) Indeed, the education lobby has successfully argued before several state supreme courts that school financing is inequitable because wealthy areas spend more on schools than do poor areas.

The data show that, on average, in the lowest job growth cities per pupil expenditures on schools are approximately $1,800 higher than they are in the highest job growth cities (Figure 6). The same is true for the other three economic measurements we use (see Table 10).

Spending on schools and student performance appear to be wholly unrelated. For example, Washington, D.C., which spent almost $6,000 per student (in 1988), has among the worst inner-city schools in the nation. Conversely, San Diego spent about $3,500 per child in 1988 for schools that are considered above average for cities its size.

Figure 6 [Omitted]

Table 10

Comparison of City Education Spending in High- and Low-Growth Cities
Measure of Growth Per Pupil Spending on Education, 1987-88
Population Growth, 1965-90
Highest growth cities (>100%) (n=12) $3,640
Lowest growth cities (<-15%) (n=18) $4,835
Job growth, 1960-89
Highest growth cities (>200%) (n=14) $3,555
Lowest growth cities (<-10%) (n=12) $5,365
Increase in female-headed households, 1970-90
Lowest growth cities (<18% pts.) (n=14) $3,708
Highest growth cities (>24% pts.) (n=11) $5,076
Real per capita money income growth, 1969-87
Highest growth cities (>25%) (n=13) $3,857
Lowest growth cities (<10%) (n=17) $4,814

Hence, low-growth cities appear to provide education, one of the major items in local budgets, much less cost-efficiently than do high-growth cities. If declining central cities could simply lower their education costs to the national average for large cities, they could reduce their per family tax burden by hundreds of dollars.

City Income Taxes and Economic Growth

A city's economic performance is influenced not only by its overall tax burden but also by the composition of its taxes. In particular, we find that income taxes have a consistently strong negative effect on city growth rates. With respect to every economic indicator we examine, only one high-growth city, Lexington, Kentucky, imposes a city income tax, whereas the low-growth cities have average per capita income taxes of approximately $100 to $200 (Table 11). The evidence suggests that imposition of a city income tax is a recipe for economic decline.

City property taxes also have a negative impact on economic growth, but not to the extent that income taxes do (Table 11). Cities with high population and job growth, as well as cities with low poverty rates, have substantially lower property taxes than cities in decline. Per capita income, however, is not negatively associated with high property taxes.

Table 11 also shows that city sales taxes have no apparent positive or negative impact on economic growth. If anything, high-growth cities rely slightly more on sales taxes than do low-growth cities. In general, growth cities tend to rely heavily on sales taxes for revenue; declining cities tend to rely heavily on income taxes.

The Impact of State Taxes on City Performance

Workers and businesses are affected not only by local tax burdens but by state taxes as well.(24) If taxes do affect the economic well-being of cities, then cities in high- tax states should grow more slowly than cities in low-tax states. We find validation of that hypothesis: high-growth cities tend to be located in states that have low combined city-state tax burdens, and declining cities tend to be found in states that have relatively high combined city- state tax burdens. State and city taxes are about $360 per person higher in cities with population losses of 15 percent or more since 1965 than in cities with population gains of 100 percent or more (Table 12).

Table 11 [Omitted]

Even more dramatic is the destructive impact of high combined state and city income taxes on the economic performance of cities. Growth cities tend to have state and local income tax burdens that are, on average, more than half those of shrinking cities. That negative relationship is shown in Figure 7, which indicates that cities that had very low income growth between 1969 and 1987 have an average per capita income tax burden of $697, while high income growth cities have an average income tax burden of only $409.

Summary of the Findings

Cities quite clearly do have some direct control over their own economic fortunes. Cities in decline are victims of bad public policies that are at least partially self- generated. In some cases they are also victims of high state taxes. Comparison of the fiscal policies of low- growth cities and high-growth cities leads to the following nine conclusions.

Table 12

Comparison of Combined State and City Finances in High- and Low-Growth Cities
Indicator of Growth State & City Own-Source Revenue* per Capita, 1990 State & City Tax Revenue† per Capita, 1990 State & City Income Tax Revenue per Capita, 1990
Population Growth, 1965-90
Highest growth cities (>100%) (n=12) $2,728 $1,527 $463
Lowest growth cities (<-15%) (n=18) $3,073 $1,885 $735
Job growth, 1960-89
Highest growth cities (>200%) (n=14) $2,695 $1,539 $390
Lowest growth cities (<-10%) (n=12) $3,148 $2,015 $784
Increase in female-headed households, 1970-90
Lowest growth cities (<18% pts.) (n=14) $2,738 $1,544 $412
Highest growth cities (>24% pts.) (n=11) $2,982 $1,785 $702
Real per capita money income growth, 1969-87
Highest growth cities (>25%) (n=13) $2,642 $1,546 $409
Lowest growth cities (<10%) (n=17) $2,951 $1,707 $697

*Excludes revenues received from federal government.

†State and city tax revenue excludes revenues received from federal government and all nontax revenues collected by the state and city, such as fees and lottery revenues.

1. Low-growth cities spend, on average, $1.71 for every $1.00 of expenditures in high-growth cities.
2. Low-growth cities have tax burdens that are roughly 50 percent above those of high-growth cities. Per family tax burdens are in many cases about $1,000 higher in low-growth than in high-growth cities.
3. Low-growth cities have much higher government pay- roll costs than do high-growth cities. On average, low-growth cities have more than twice the number of municipal employees per 10,000 residents that high- growth cities have.
4. Low-growth cities are much more likely to impose a local income tax than are high-growth cities.
5. Low-growth cities tend to rely heavily on income and property taxes for revenues, whereas high-growth cities rely heavily on sales taxes.
6. Low-growth cities routinely spend $1,400 more per student on education than do high-growth cities.
7. Combined state and local tax burdens are substantially higher in low-growth cities than in high-growth cities.
8. State and local income tax levels are much higher in low-growth cities than in high-growth cities.
9. High spending and taxes in low-growth cities are a cause of urban decline. High taxes and expenditures at the beginning of a period are consistently associated with subsequent slow economic growth rates.

Figure 7 [Omitted]

Those results were replicated when we ran several variations of the basic model and when we examined different samples of cities. For example, we examined the relationship between city growth and fiscal policies for just the 50 largest cities, and the results were the same. We tested the results by excluding from the sample all city-counties and obtained the same basic results. We tested other variables not mentioned above. For example, we ran the analysis using all city spending--including spending on health, education, and welfare--and the results were even stronger.

Finally, we examined the statistical relationship between the economic growth of cities and the growth in city taxes and spending and confirmed a consistent inverse relationship.(25) In sum, the results are robust; they are not a function of specific variables tested, or the city sample, or the time period investigated.

Our findings are also confirmed by several previous studies on fiscal policy and economic growth of cities.(26) Most of the recent economic literature reports a very clear negative relationship between taxes and economic growth at both the state and the local level. One study, for example, found that every day in the 1980s, 1,000 people left the 10 states with the highest income tax rates for the 10 states with the lowest income tax rates.(27) That was a migration of almost 4 million people. Another related study by the Joint Economic Committee of Congress examined the impact of taxes on urban economic growth in 30 large U.S. cities and came to conclusions that were very similar to ours.

The cities in the sample with the greatest economic growth in the 1969-1978 period had much lower average state and local tax burdens [7 percent of family income] than the cities with relatively low growth [11.4 percent]. Moreover, the high growth cities also relied much less on income taxation in raising revenues. Beyond that, more of the low growth cities had highly progressive income taxes than high growth cities.(28)

Similarly, economic studies have identified sizable negative employment effects of Philadelphia's high business taxes.(29) Federal Reserve Bank of Philadelphia economist Robert Inman concludes his recent analysis of the impact of further tax increases on the Philadelphia economy by noting that each additional $1 of property tax levies would reduce home values by $5 and that each $1 of additional taxes on wages would reduce family incomes by $8.(30) Because of the shrinkage of the tax base caused by excessive local tax rates, Inman says: "Can Philadelphia escape its current fiscal crisis with a tax increase? The answer is no."(31)

Anatomy of Urban Decline: The Case of New York City

New York City is a case study in how high spending and taxes can damage the economic and social infrastructure of a city. Since the late 1960s, half a million people and some 50 Fortune 500 company headquarters have packed up and left the Big Apple. In the past three years alone, the city has lost 10 percent of its private-sector jobs. That rate of job loss is seven times greater than the rate for the nation as a whole.(32) The city's economic decline has corresponded with a stunning growth of city spending and taxes. Twenty- five years ago John Kenneth Galbraith of Harvard said that there was nothing wrong with New York that doubling the city budget wouldn't solve. City officials have been testing that hypothesis ever since. Between 1965 and 1990 New York City's expenditures, adjusted for inflation, have not doubled, they have almost tripled--from $14 billion to $37 billion. Its budget is now larger than those of all but two states.

Even more dramatic is how New York City officials find ways to spend $37 billion. For example, William Tucker, author of The Excluded Americans: Homelessness and Housing Policies, estimates that rent control, exclusionary zoning, and other city housing policies force New York to pay $1.1 billion annually for services that "in other cities, the private housing market provides for free."(33)

New York City has the most generous welfare benefit structure in the nation outside California. More than 1 million people--or almost one of every seven city residents--receive checks from the government each month.(34) The public school system spends over $7 billion a year, or $6,500 per student, on classrooms that are among the very worst in the nation. Only slightly more than one-third of high school students in New York City's public schools graduate on time, if at all.(35)

More than any other city in the United States, New York is paralyzed by a culture of bureaucracy. With 330,000 people on the public payroll, New York City has more government workers than all but a few cities have people. It has three times more staffers per resident than the average U.S. local government. Some 50,000 new employees have been hired since 1980 alone, although the city's population has not grown at all.(36) The city has 4,500 school administrators compared with fewer than 50 in New York's superior Catholic school system.

New York City is also one of the most generous employers--public or private--in America. Thanks in large part to two decades of astounding concessions to the municipal unions, the average annual pay for a New York public school janitor is $57,000, and some make as much as $80,000. For many employees, after 15 years on the job, combined sick days, holidays, and vacation time amount to 51 days off each year.(37) In other words, they work the equivalent of four days a week.

To pay for its hefty budget, New York City imposes a suffocating tax burden on working families and businesses. The New York City Comptroller's Office reports that in 1991 "New Yorkers carried approximately triple the tax burden of local government that other Americans must carry."(38) The gap is steadily widening. In 1950 New York's city and state tax burden was 40 percent above the national average; now it is 80 percent higher. In addition, New York City has the highest capital gains tax rate (36.4 percent) of any area in the nation, a dubious distinction for a financial capital trying to retain its leadership in a global economy. New York Citizens for a Sound Economy finds that property taxes are 94 percent higher than in other major cities.(39) In many parts of the country, taxes on modern office space are $2 to $3 a square foot, versus $5 to $12 in New York City.(40)

A recent study by the New York City Comptroller's Office concludes that high taxes are contributing directly to the city's economic free fall.(41) Employing a statistical model that explains 96 percent of the fluctuation in year- to-year employment in New York City, the study finds that each $100 million increase in local taxes leads to a loss of 10,800 jobs. It finds that "the rapid increase in the tax burden, which began in the 1960s and continued through the mid-1970s, was a factor that contributed to the economic downturn that led to the city fiscal crisis of 1975-78."(42) The situation has never been ameliorated. The tax increases enacted in fiscal years 1991 and 1992 are expected to reduce the city's private-sector payrolls by 265,000 jobs. Because of the impact of the recent tax hikes on jobs, the Comptroller's Office predicts that by 1994 "the city will collect only $390 million in additional revenues, just 14 per- cent of the hoped for $2.8 billion increase in city tax revenues."(43) Seldom have the principles of the Laffer curve been so conclusively validated.

Urban Decline and Federal Aid

Despite New York City's massive and self-generated budget build-up, the city's mayor, David Dinkins, recently blamed urban decline on the Reagan-Bush administrations' "12 years of neglect of the cities."(44) He calculates that if federal aid had kept pace with the growth of the city budget, New York City would have had nearly $4 billion more to spend in 1992. The American Federation of State, County and Municipal Employees, the largest government employee union, has released a report charging that "domestic programs suffered a $231 billion cut during the Reagan and Bush administrations."(45) Capitalizing on the aftershock of the Los Angeles riots, the urban lobby has demanded a $35 billion "Marshall Plan for the cities."(46)

There are several reasons federal aid to cities should not be increased.

Cities Are Not Underfunded

Cities have a multitude of problems, but too little money is not one of them. Real per capita city spending escalated from $435 in 1950 to $571 in 1965 to $1,004 in 1990 as shown in Figure 8. At the start of that spending binge, America's largest cities were at the peak of prosperity--indeed, they had higher per capita incomes than the suburbs.(47) Now incomes are 50 percent lower in the cities than in the suburbs. A nearly 2.5-fold increase in outlays has not prevented urban bleeding; if anything, it has accelerated it.

Figure 8 [Omitted]

Those figures understate the true extent of the budget build-up in cities. In the 1950s and early 1960s cities had primary responsibility for funding welfare programs and indigent health care, whereas today the burden of funding anti-poverty programs is borne mostly by the federal government and the states. In fact, most cities spend a much smaller share of their budgets on health and welfare than they did 40 years ago--22 percent in 1950 versus 12 percent today.(48)

The cities that are least underfunded today are not the smaller, more affluent communities but the largest cities (i.e., those that would be the beneficiaries of more federal aid). Cities with populations over 500,000 spend roughly $1,200 per resident (excluding health, education, and welfare), whereas communities with populations under 75,000 spend about $550. The primary reason the expenditures of large central cities are so excessive is not that those cities have more responsibilities; it is that they are increasingly inefficient in providing basic services. It costs New York, Chicago, Los Angeles, Philadelphia, and other big cities twice as much to educate a child, collect garbage, build a road, police a neighborhood, and provide other basic services as it does smaller communities.(49)

Urban Aid Was Not Drastically Cut in the 1980s

From 1980 to 1990 direct federal aid to cities was reduced by about 50 percent. That reduction was made up in many ways. A recent study in the American Economic Review reports that for every dollar the cities lost in federal aid, they received an additional 80 cents in state aid.(50) Moreover, while direct federal aid to cities was cut in the Reagan years, aid to poor people living in cities increased. Federal social welfare spending--on education, training, social services, employment, low-income assistance, community development, and transportation--rose from $255 billion to $285 billion in real dollars from 1980 to 1992. Those figures exclude Social Security, Medicare, and Medicaid-- programs that have exploded in cost and significantly benefit inner-city residents as well.

Since 1989 domestic spending across the board, including spending on urban aid, has exploded.(51) Real federal domestic spending under George Bush grew by almost 25 percent in three years, the fastest rate of growth of the domestic budget under any president in 30 years. In real terms, cities and states received more federal money in 1992 than in any previous year.

Direct Federal Aid to Cities Has Not Been an Efficient Investment

Since the late 1960s the federal government has spent $2.5 trillion on urban renewal and the War on Poverty,(52) or the equivalent of 25 Marshall plans. The reason the money has not caused an urban revival is that the programs, particularly those that were abolished in the 1980s, did not work. For example, Urban Development Action Grants, which were finally abolished in 1987, subsidized the construction of major chain hotels, such as Hyatts, and luxury housing developments with rooftop tennis courts, health spas, and indoor tennis courts in Detroit.(53)

Despite federal grants totaling over $50 billion for urban transit since the mid-1960s, total transit ridership has declined.(54) The federal government spent over $2 billion to build Miami's Metrorail, which Miamians call Metro- fail; today it has less than 20 percent of predicted ridership, and its operating subsidies are in the hundreds of millions of dollars a year. Before he retired from the Senate, William Proxmire presented his Golden Fleece Award to the Urban Mass transportation Administration for "playing Santa Claus to America's cities" and for being "a spectacular flop." Similarly, a Congressional Budget Office audit of federal wastewater treatment grants to cities found that construction costs were 30 percent higher when plants were built with federal funding than when local taxpayers footed the bill.(55)

Even cities that have received huge infusions of direct federal aid have not been able to leverage those funds to resuscitate their economies. For instance, from 1968 to 1972 Gary, Indiana, received more than $150 million in federal dollars for urban renewal--or about $1,000 per resident--yet Gary's deterioration continued.(56)

In summarizing the impact of federal urban aid programs, the New York Times recently conceded, "Despite trillions of dollars spent over the years on thousands of different government social programs, politicians are no closer to agreement today than they were a generation ago about the best ways to lift people out of poverty and make the cities a better place to live."(57) An even sadder commentary was recently offered by Tom Joe, director of the Center for Study of Social Policy in Washington. "I hate to say it, but the programs that really work are those that get people out of the inner city."(58)

Federal Aid to Cities Does Not Improve Urban Economies

Cuts in urban aid, to the extent they occurred at all, cannot account for the Los Angeles riots, the exodus from New York City, the sky-high poverty in Detroit, and other woes of the central cities. The period of catastrophic decline of population, incomes, and jobs in central cities was the 1970s, when urban aid exploded. By every meaningful measure of social and economic progress, the 1970s were the worst decade for cities since at least the 1930s.

By contrast, for many big cities, the Reagan years were a period of economic gains. "The 1980s was the best decade in this century for the old central business districts," insists Washington Post reporter Joel Garreau in his new book on urban America, Edge City. "From Boston to Philadelphia to Washington to Los Angeles to San Francisco to Seattle to Houston to Dallas to Atlanta, the business districts of the downtowns thrived."(59) Adjusted for inflation, the tax base of America's inner cities expanded by a robust 50 percent in the 1980s, compared to an anemic 20 percent in the 1970s. The entrepreneurial explosion unleashed by Rea- ganomics had a very positive effect on the finances of big cities.

Medium-sized areas fared even better. More than 150 thriving new suburban cities have grown up in the United States during the past decade--places such as Fairfax, Virginia; Mesa, Arizona; and Irvine, California. They have quickly become America's new centers of enterprise and job creation. Until the recent recession, the problem confronting those booming cities was too much development and business investment, not too little.

An Agenda for Urban Renaissance

Reviving America's depressed cities will require implementation of a growth-oriented agenda on the part of the federal government, the states, and the cities. The overriding goal of such a strategy must be to provide incentives for people, businesses, and capital to return to the inner cities.

The Federal Role

The federal government is a creation of the states. The cities are legal entities of the states. A proper adherence to the constitutional principles of federalism would dictate that the federal government have almost no direct relationship with cities. All federal programs that give direct aid to local governments and all federal regulations that mandate local spending should be abolished. Federal aid, to the extent that it continues, should be provided to the states. If cities and other jurisdictions of the states are in need of financial aid, it should be provided by the state legislatures.

If Congress feels compelled to assist areas that have deep pockets of poverty, money should be given directly to poor people, not to city bureaucracies or service providers. There seems to be a bipartisan consensus emerging on such a strategy. A Brookings Institution report on urban decline maintains that policymakers "should consider switching more federal aid from empowering governments to deliver services, to empowering individuals and households to purchase services or provide their own."(60)

There are practical as well as philosophical objections to federal grants to cities. As is the case with federal aid to foreign countries, little of the money ever gets filtered through the city bureaucracies. For example, according to the Wisconsin Policy Research Institute, Milwaukee spends about $1.1 billion in federal, state, and local money annually on poverty abatement.(61) That money flows through 68 programs that spend almost $30,000 per poor family. But only about 35 cents of every dollar ever gets to the poor. Most of the federal money funds a massive welfare industry.

Probably the only effective federal agenda for aiding the cities is the promotion of national economic growth. The lesson of the past three decades is that central cities' economic fortunes often turn with the national economy. In the slow-growth, high-inflation 1970s cities rapidly deteriorated; in the prosperous 1980s cities partially revived; but in the recessionary 1990s cities are again financially strapped. Reducing federal deficit spending through expenditure control, growth-oriented reductions in payroll and capital gains taxes, a noninflationary monetary policy, and regulatory relief will have a very positive effect on cities. It would be best to provide the stimulus of tax cuts and regulatory relief to all areas nationwide, but if politics precludes doing so, then the enterprise zone concept is viable, as long as it means tax reduction and deregulation, not a new subsidy program


An Urban Growth Agenda for the States

State governments substantially increased their aid to cities in the 1980s, but during the current recession, which has caused budget problems in state houses, state aid to localities has declined. In general, reduction of that aid is appropriate. States should not be in the business of paying for locally provided services or of acting as the cities' tax collectors. Whenever possible, local services should be paid for with local taxes. State aid to localities is defensible only when it distributes funds exclusively to lower income jurisdictions or pays for services that provide a direct benefit for the entire state.

Our evidence suggests that the principal way that state governments can promote the economic growth of their cities is to reduce the overall state tax burden, particularly the income tax rates on individuals and businesses. States without an income tax--including Florida and Texas--tend to have healthy and growing cities. Cities in northeastern states have clearly been harmed by the high state taxes in that region. For example, New York City has estimated that a $900 million tax increase proposed by the state would cost the city some 300,000 jobs.(62)

What Cities Can Do to Increase Growth

The central argument of this study is that the key to restoring economic vitality and capital investment to declining cities is to reduce the costs of providing municipal services and then slash the heavy tax burdens that are required to pay for them. That can be done. For no justifiable reason, unit service costs are substantially higher in large cities than in small cities--whether the service is education, bus service, street cleaning, park maintenance, garbage collection, or police protection.

Labor costs appear to explain much of the inefficiency. Salaries of government workers in suburbs average $2,150 a month compared to $2,700 a month in cities with populations over 500,000. If benefits were added to the calculations, the disparities would be much wider. Large cities also pay their employees substantially more than comparably skilled private-sector workers receive, and the disparities are growing larger.(63)

Those considerations suggest that if cities had the political will to cut service costs and taxes, they could do so without sacrificing vital services. One way to begin is to competitively contract for services. Smaller cities contract out municipal services routinely; large unionized cities seldom do. Indeed, some cities, such as La Mirada, California, contract out almost all their services and thus have tiny city bureaucracies. Several dozen studies verify that unit costs are reduced 20 to 50 percent by contracting out to the private sector.(64) Moreover, the quality of contracted-out services is rated higher than that of services offered in-house.(65)

Some progress does appear to be taking place. In Chicago under Democratic mayor Richard M. Daley, several major operations have been contracted out with savings in the millions of dollars.(66) Long-time Chicago City Council finance chairman Edward M. Burke, also a Democrat, says that "privatization introduces the efficiency and productivity incentives of the private sector into public services."(67) Similar successful privatization initiatives have been launched in Indianapolis.(68)

Still, public employee unions are so powerful in some large cities that not only is contracting out effectively prohibited, but any private-sector competition with the government monopoly service provider is forbidden by regulation. For instance, in New York City private van and jitney services are providing fast, reliable transit for Manhattan commuters, yet the city transit agency has acted to shut those private operators down.(69) That action is contrary to the interests of residents and area workers. City provisions that prohibit private competition with the government should be ended.

Education is one of the largest items in city budgets. As shown above, the declining cities tend to have much higher per student costs, despite generally lower quality public schools. In most large cities today, private schools provide a better education for half the cost of inner-city public schools. Central cities can cut costs significantly by recognizing that when parents send their children to private schools there are huge savings for the public school system. Even accounting for the fact that some school costs are fixed, if cities were to provide inner-city parents with incomes under $30,000 a voucher of, say, $2,500 per year to send each child to a private school, the public school systems could significantly reduce their operating costs, and educational opportunities for children of low-income families would be improved. Milwaukee is already experimenting with such an approach, which is having favorable results but meeting fierce bureaucratic resistance.

As discussed above, there are diseconomies of scale in municipal services. Some cities, such as New York, have such powerful special-interest lobbies and such entrenched bureaucracies that it has become politically impossible to cut service costs, even in times of severe crisis.(70) That suggests that the largest 20 cities, at least, could reduce costs by splitting service responsibilities and conferring taxing authority on city districts, villages, or even home-owner associations.(71) If the provision of services and the levying of service taxes were closer to homeowners and businesses, taxpayers would have greater influence on decisions about which services they need and which they do not, and they could place greater pressure on the government to reduce costs by diluting the influence of special-interest groups.

An even more radical idea is for cities to acknowledge that they have become unmanageable at their current size and to split up into separate smaller jurisdictions. It would make sense, for example, for each borough of New York City to become a separate city. Service responsibilities that cannot be conveniently divided, poverty programs perhaps, could then be borne by the county government. That may not be as outlandish as it sounds. Staten Island has been threatening to secede from the city for years.

Finally, cities can lure businesses and people back by changing the composition of taxes. We have shown that city income taxes have a devastating effect on economic growth. If all cities with income taxes were to replace them and other taxes on industry with sales taxes, those cities could substantially improve the business climate within their borders. City income taxes are defended by local officials as "fair" because they fall primarily on upper income individuals and big business. In practice those taxes are paid by the working poor, the middle class, and small business owners, because the wealthy have fled most cities with income taxes or have received legislative exemptions from high taxes.


Urban advocates are right when they say that America's inner cities have been victims of destructive government policies. They have--but not those of Reagan or Bush. The wounds of the central cities are largely self-inflicted. A 1988 private audit of nearly bankrupt Scranton, Pennsylvania, stated that "the city government appears to exist for the benefit of its employees instead of the people."(72) Regrettably, those words could describe the operating principles and skewed priorities of too many ailing cities. Unless and until America's central cities start putting people first, by cutting service costs and anti-growth tax rates, no amount of federal aid can reverse the decline of urban America.


(1) Unless otherwise indicated, all the data presented in this study come from the U.S. Census Bureau.

(2) From 1980 to 1990 the proportion of black suburban residents who had previously lived in metropolitan areas grew from .27 to .32; the proportion of Hispanics grew from .40 to .43; and the proportion of Asians grew from .48 to .51. See William H. Frey, "Minority Suburbanization and Continued 'White Flight' in U.S. Metropolitan Areas: Assessing Find ings from the 1990 Census," Population Studies Center, University of Michigan, Research Report no. 92-247, 1992.

(3) New York City Comptroller's Office, Economic Notes, July 6, 1992, p. 1.

(4) The most prominent recent example is David Lyon and James Steinberg, Urban America: Policy Options for Los Angeles and the Nation (Santa Monica: RAND Corporation, 1992).

(5) Quoted in Rochelle Stanfield, "Cast Adrift, Many Cities Are Sinking," National Journal, May 9, 1992, p. 1121.

(6) "Mayors Say Urban Plan Falls Short," Boston Globe, May 14, 1992, p. 1.

(7) The Marshall Plan lasted from 1948 to 1951 and had a total price tag of $17 billion, the equivalent of $96 billion in 1991 dollars. See Doug Bandow, U.S. Aid to the Developing World (Washington: Heritage Foundation, 1983).

(8) Walter Williams, in "Policy Forum," Cato Policy Report 14, no. 6 (November-December 1992): 9.

(9) Wendell Cox and Samuel A. Brunelli, "The Untold Story: The Rapid Growth in City Revenues," American Legislative Exchange Council, Washington, August 1992.

(10) Wendell Cox and Samuel Brunelli, "America's Protected Class: Why Excess Public Employee Compensation Is Bankrupt ing the States," American Legislative Exchange Council, Washington, February 1992.

(11) Rachel Flick, "How Unions Stole the Big Apple," Readers Digest, January 1992, p. 40.

(12) David N. Dinkins, "Will Washington Heed the Marchers?" New York Times, May 5, 1992, op-ed page.

(13) According to the news story, business leaders blame the exodus of manufacturers on "a decline in the skills of Chi cago workers, crime, lack of reasonably priced parking, a need for more efficient one-story factories that can be expanded if necessary, and what manufacturers consider an unfriendly tax structure." See "Factory Flight Hits Record Pace," Chicago tribune, February 14, 1992, p. 1.

(14) "Over Half of City's Young Black Men in trouble," Baltimore Sun, September 1, 1992, p. 1.

(15) Frey.

(16) Four cities are excluded from the analysis because of problems of noncomparability. Those cities are Washington, D.C.; Honolulu, Hawaii; Orlando, Florida; and Virginia Beach, Virginia. (Washington, D.C., is included in the analyses in which combined state and city finances are exam ined.) All cities in the sample have populations of 150,000 or more.

(17) "Businesses Are Folding at Record Clip in the State," Los Angeles Times, August 6, 1992, p. B-5.

(18) Fourteen of the cities in our survey are also independent counties. To test whether their inclusion biased the results of our findings, we ran our analysis without the city-counties. The results were no different without them.

(19) Health, hospitals, education, and welfare constitute on average 20 percent of the budgets of the cities in our survey. The percentages range from a high of 50 percent in Memphis, Worcester, and New York City to a low of zero in Salt Lake City, Fresno, San Jose, and Jackson. We also ran our analysis including those spending categories, and the findings were virtually the same.

(20) We use female-headed households as a proxy for poverty rates because, at the time of this study, the 1990 poverty rates by city were not available.

(21) For intact families the poverty rate was about 5 per 1,000, while single-parent families had a poverty rate of 42 per 1,000. See Donald Devine, "From the One, Refinding the Many," Washington Times, May 29, 1992, p. F-1.

(22) See, for example, Helen F. Ladd, America's Ailing Cit ies: Fiscal Help and the Design of Urban Policy (Baltimore: Johns Hopkins University Press, 1991).

(23) High-income areas would be expected to have somewhat higher education costs than low-income areas. Schools in affluent areas must offer educators higher salaries because wages are generally higher for all professions in those cities.

(24) See, for example, Stephen Moore, "A Pro-Growth Tax Agen da for the States in the 1990's," Texas Public Policy Foun dation, San Antonio, 1991; and Robert Premus, "Location of High Technology Firms and Regional Economic Development," Joint Economic Committee of Congress, 1982.

(25) The correlation between fiscal variables and economic performance variables ranged between 0.3 and 0.5. The specific results from these and other analyses are available upon request.

(26) For a summary of those studies, see Moore, "A Pro-Growth Tax Agenda."

(27) "Fleeing Tax Fairness," Wall Street Journal, June 12, 1991, editorial page; and Richard Vedder, "Taxes, Economic Growth, and the State and Local Fiscal Crisis," University of Tennessee, Chattanooga, Center for Economic Education, 1991.

(28) Joint Economic Committee of Congress, "State and Local Economic Development Strategy: A Supply-Side Perspective," 1981.

(29) Robert P. Inman, "Can Philadelphia Escape Its Fiscal Crisis with Another Tax Increase?" Federal Reserve Bank of Philadelphia Business Review, September-October, 1992, pp. 5-18; and Ronald Grieson, "Theoretical Analysis and Empirical Measurements of the Effects of Philadelphia's Income Tax," Journal of Urban Economics, July 1980.

(30) Ibid., p. 17.

(31) Ibid., p. 6.

(32) New York City Comptroller's Office, Economic Notes.

(33) William Tucker, The Excluded Americans: Homelessness and Housing Policies (Washington: Cato Institute, 1989).

(34) Raymond J. Keating, "A Response to the Governor's New Deal for New York City," Issues and Answers, New York Citizens for a Sound Economy, 1991.

(35) Ibid.

(36) Dan Cordtz, "Managing New York," Financial World, February 19, 1991, p. 49.

(37) Flick.

(38) New York City Comptroller's Office, "Report by the Chief Economist, Comptroller's Budget Office on the Impact of the Local Tax Burden on New York City's Economy," April 1991.

(39) Keating.

(40) Marisa Manley, Testimony at New York City Comptroller's Hearings on the New York City Economy, October 23, 1991.

(41) New York City Comptroller's Office, "Report by the Chief Economist."

(42) Ibid., pp. 1-2.

(43) New York City Comptroller's Office, "Report on the Effect of Private Sector Job Losses on New York City Reve nues," June 1991, pp. 2-3.

(44) Dinkins.

(45) "The Republican Record: A 10-Year Analysis of State Losses of Federal Funding," American Federation of State, County and Municipal Employees, Washington, 1992.

(46) "Mayors Say Urban Plan Falls Short," Boston Globe, May 14, 1992, p. 1.

(47) Larry Ledebur and William Barnes, "Metropolitan Disparities and Economic Growth," Research Report, National League of Cities, Washington, 1992.

(48) Cities also spend a smaller share of their budgets on capital expenditures. In 1961 capital expenditures were 26 percent of city budgets, whereas today they constitute just 13 percent. That means that the greater spending of cities is due to higher operating costs. See "Changing Patterns in State-Local Finances," General Accounting Office, 1992.

(49) An analysis of one city's spiraling service costs is found in William Niskanen, "The District of Columbia: America's Worst Government?" Cato Institute Policy Analysis no. 165, November 18, 1991. See also Cox and Brunelli, "The Untold Story."

(50) Helen F. Ladd, "State Assistance to Local Governments: Changes during the 1980s," American Economic Review, May 1990, pp. 171-75.

(51) Stephen Moore, "Crisis, What Crisis? George Bush's Never-Ending Domestic Budget Build-Up," Cato Institute Policy Analysis no. 173, June 19, 1992.

(52) That money has been spent on education, training, employment, social services, Aid to Families with Dependent Children, FDC, food stamps, SSI, Medicaid, housing, trans portation, and other community development assistance programs.

(53) Stephen Moore, "Slashing the Deficit: Fiscal 1987," Heritage Foundation, Washington, 1986.

(54) Jean Love and Wendell Cox, "False Dreams and Broken Promises: The Wasteful Federal Investment in Urban Mass transit," Cato Institute Policy Analysis no. 162, October 17, 1991.

(55) "Efficient Investment in Wastewater treatment Plants," Congressional Budget Office, 1985, pp. 4-5.

(56) "America's Cities," The Economist, May 9, 1992, p. 22.

(57) David Rosenbaum, "Concern, Cash, But No Accord on Urban Woes," New York Times, May 10, 1992, p 1.

(58) Quoted in ibid., p. 22.

(59) Joel Garreau, "Life on the Edge," Washington Post, May 17, 1992, p. C4.

(60) Katherine Bradbury, Anthony Downs, and Kenneth Small, Urban Decline and the Future of American Cities (Washington: Brookings Institution, 1982). Emphasis in original.

(61) "Welfare Spending in Milwaukee County: Where Does the Money Go?" Wisconsin Policy Research Institute, Milwaukee, 1992.

(62) See New York City Comptroller's Office, "Report on the Effect of Private Sector Job Losses on New York City Revenues."

(63) Cox and Brunelli, "America's Protected Class."

(64) Some of those studies are listed in Stephen Moore, "How to Privatize Federal Services by Contracting Out," Heritage Foundation Backgrounder no. 494, March 13, 1986.

(65) Stephen Moore, "Does Privatization Really Harm Public Employees?" Partnership Focus, June 1990, pp. 18-22.

(66) Edward M. Burke, "A Private Solution for Public Services," Chicago tribune, October 23, 1991.

(67) Ibid.

(68) The city has already saved nearly $1 million by con tracting out street cleaning, snow removal, and microfilming services. Another $1.2 million in savings is expected as the result of further privatization. See "Bureaucrats Should Note SELTIC Successes, Innovative Initiatives," Indianapolis Business Journal, April 27, 1992, p. 6A.

(69) Daniel Machalaba, "Opportunistic Vans Are Running Circles around City Buses," Wall Street Journal, July 24, 1991.

(70) Sam Staley, "Bigger Is Not Better: The Virtues of Decen tralized Local Government," Cato Institute Policy Analysis no. 166, January 21, 1992.

(71) See Advisory Commission on Intergovernmental Relations, "Residential Community Associations: Private Government in the Intergovernmental System?" Washington, 1989.

(72) Cited in "Urban Therapy," Wall Street Journal, January 21, 1992, editorial page.

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