High Inequality Within US Metros Calls for Regional Tax Bases

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Everybody knows that having a national fiscal union means that some US states are “makers” and other states are “takers.” PA is a “maker” state, whose residents pay more federal taxes than they get back in public goods and services. States like West Virginia are “taker” states, who pay for less than they get:

This is a perenially annoying feature of US politics, since the very places who benefit most from government transfers tend to elect nutty politicians with a taste for vilifying the big metro regions who butter their bread.

It’s fun to grouse about it, but this is what it takes to make the currency union work, and we’re all generally better off than we’d be if it was every state fending for itself.

You see the same thing inside individual states. The top 5 PA metro regions – Philadelphia, Pittsburgh, Lehigh Valley, Harrisburg and Scranton produce 78% of Pennsylvania’s GDP. The big metros produce most of the state’s tax revenue, but don’t get back as much as they give. The big urbanized areas are subsidizing state spending in poorer less populous areas of the state.

Again, very annoying, but that’s what it takes to run the government of such a big state on both a practical and political level. If you want the Philly and Pittsburgh tax bases, you’re going to have to fund public goods and services in the massive region in between, and that’s going to require some transfers and subsidies to areas that lose money for state government.

What’s really weird is that even though the political system accepts a high level of cross-exposure and geographic wealth redistribution at the federal and state level, there’s a ton of hostility to this concept at the regional level.

Ironically, that’s the level where there ought to be the greatest sense of common purpose and good neighborly feelings. And yet, at least in the Northeast, when you start talking about regional tax bases people get all apocalyptic about mixing the suburban tax dollars with the city tax dollars.

I’m inclined to believe it’s a race thing, but whatever the reason is, people need to wise up because there’s a huge amount of income inequality within metros. However important you think that is as a standalone issue, one area where it creates a big problem is funding public services.

Within metro regions, you see these huge disparities in public service funding. One suburban tax base will have super fancy schools, and then right next door there’s an urban tax base with dilapidated schools. Despite the obvious exposure suburban micro economies have to city crime and poverty, there’s just massive resistance to the idea that any suburban residents’ tax dollars would be used to improve conditions in cities.

On the other hand, there’s a good case to be made that urban areas are really cross-subsidizing suburban development in the long run, as the maintenance bills for new greenfield developments eventually come due. In that case, suburban areas would be fortunate to be part of a regional tax base that makes intra-regional subsidies and transfers possible.

However you think it shakes out, there’s no doubt that towns in the same metro region are exposed to the economic prosperity and hardships of neighboring towns, and it would make more sense to band together in regional tax bases than to let each tiny town brave the elements on its own.

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