An Agenda for Fighting Income Inequality at the Local Level

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Over at Next American City, Jake Blumgart is thinking about a local government agenda for reducing income inequality. I spend a lot of time thinking about this issue as well, since there’s a lot of wealth at the metro level, and local public policies arguably do more to shape peoples’ day-to-day lives than what federal and state governments do.

Of Jake’s recommendations, I am most enthusiastic about reforming felony employment laws, cracking down on wage theft, and bringing back Philly’s ill-fated Wage Tax Rebate.

I think the other recommendations are vulnerable to two main categories of criticism – exit pressure (minimum wage, paid sick leave), and effects on cost of living (Community Benefit Agreements, Project Labor Agreements).

With Pennsylvania’s excessive number of municipal governments – 2562 municipalities in total, the highest local government density in the nation – a person can hardly step a few meters in any direction without crossing into a different political jurisdiction. Local governments are under considerable exit pressure – moreso than in states where local governments preside over larger land areas – not to pass policies that businesses find unfavorable.

Jake cites a number of studies showing that businesses have not fled cities like San Francisco, Washington DC and Santa Fe when they established a local minimum wage. It’s persuasive, but I would be very cautious about applying this to Pennsylvania’s cities. Philadelphia is the only city that is both a city and a County. The land area is large, so I don’t really think that a Philadelphia minimum wage would cause service businesses to flee. Niche service businesses like ethnic restaurants and independent retailers are choosing city locations because the higher population density creates the deep markets they need to thrive. Lots of small business models that work in a denser city like Philly wouldn’t work in low-density suburbs.

Places like Philadelphia and Pittsburgh are probably sufficiently strong magnets for residents and employers that they face low enough exit pressure to pass policies like a local minimum wage or paid sick leave. They have enough draw that they can credibly call employers’ bluffs when they threaten to leave. I think cities like Scranton, or Allentown or Bethlehem or Lancaster probably cannot credibly call employers’ bluffs yet. The local service markets in those cities are probably not yet strong enough for local governments to put additional demands on employers. Eventually they may be.

I also have to wonder how recent business trends like food trucks and mobile vendors would be affected by minimum wage and paid sick day laws. Even if the laws kicked in once a certain employment quota was met – say, 5 employees – the quota would create something of a disincentive to grow beyond that. Lots of food trucks, for example, end up becoming traditional storefront restaurants when they become more popular.

If you’re a food truck owner with 4 employees, and you’re considering whether to expand into a storefront business and hire a few more people to be hosts and servers and dishwashers, crossing that threshold into Responsible for Minimum Wages and Paid Sick Days territory is definitely going to weigh on your decision. That’s not to say all or even most people in that position would choose not to expand, but we shouldn’t be too quick to dismiss the potential for deadweight loss to downmarket business opportunities. That’s the bigger worry. You can easily address the exit pressure issues by passing these policies at the County level instead of the municipal level.

The Community Benefit Agreement recommendation is the only part of Jake’s program I really can’t get behind. The problem with CBAs is similar to the problem with mandatory parking minimums. We really need to stop bundling the cost of unrelated goods and services into the cost of housing.

Lots of well-meaning people like to imagine that by forcing “developers” to pay for some extra public goods or services in addition to the housing development, the extra money will come out of their profit margins. In reality, the costs of the CBA just get bundled into rents, pushing up housing costs. Now, maybe it’s the case that you think you’ve hit upon some public good or service that’s going to be more useful to people than having some extra cash in their pockets.

From what I’ve seen, the things people typically tend to demand are either non-essential club goods like parks and open space, or public spaces like waterfront esplanades that really should just be funded out of the regular city capital budget. Sometimes people demand inclusionary zoning agreements, where a few lucky people get below-market rate apartments at the cost of higher market rents for the vast majority of city residents.

In nearly every case I think most low-income housing consumers are going to be better off if cities stop tacking unrelated extras onto the cost of housing, and focus singularly on adding more total housing supply. Pay for public goods and services out of the regular budget, stop bundling parking and public space with housing, and give more people the choice of paying for only the housing component – no extra bells and whistles. The goal should be to keep rents close in line with construction costs.

That brings me to what I think is a more promising strategy for reducing inequality within metro regions – lowering the cost of living.

There are two sides to what are known as “real wages.” There’s the nominal wage – your paycheck – plus there’s the cost of living – how far your paycheck goes. If your paycheck goes up a little, but your housing and transportation costs go up by even more, your real wage went down. If your paycheck stays the same, but your housing and transportation costs fall by even more, your real wage went up. I think local governments can make a bigger difference on inequality by focusing on reducing the cost of living.

The big items low-income people spend money on are basic subsistence – food, housing, and transportation. So it’s a big problem that housing and transportation prices are increasing faster than wages. Local governments do a number of things to make these things more expensive than they need to be, and there’s a lot of room to reduce them substantially and increase real wages. Here are a few:

1. Ditch the Segregationist Land Use Toolkit – Stop creating housing shortages with anti-density zoning rules. Stop bundling parking with housing, and price curb parking at market rates. Stop restricting building heights on expensive land near transit, and in wealthy neighborhoods. Stop limiting housing with too-low floor-area ratios.

2. Tax Land, Not Buildings – when Allentown city council passed the land value tax back in 1996, and started taxing land values at 5 times the rate for structures, 75% of city property owners got a tax cut. Not because total revenue dropped, but because the tax burden shifted to people who own lots of unimproved or vacant land. If Philadelphia adopts the land value tax, taxes are projected to drop for most residents in every Council district. Lower taxes on buildings = lower rents = more disposable income.

3. Stop Restricting Competition Between Food Sellers As low-overhead food sellers like food trucks and mobile carts have exploded onto the scene in recent years, many cities have reacted by caving in to complaints from traditional businesses that food trucks’ low prices are hurting their profit margins. Laws that restrict mobile vendors’ proximity to traditional storefronts, or make them move around all day, or meet deliberately-excessive health code standards restrict competition and result in higher prices and crappier food. Lower-cost, higher quality prepared food raises the living standards of low income people, and lower overhead businesses make it easier for people without much access to capital to start businesses.

4. Free Public Transportation Most cities use a fare system to, at least partially, fund public transportation but it doesn’t have to be that way. Some cities are experimenting with no-fare public transit, and funding it out of general taxes instead. Needless to say, this would be a huge increase in real wages for the lower-income people who use transit. The best possible option would be to pay for it through an increase in the land tax rate on land within half a mile of transit stations.

5. End the County Quota System for Liquor Licensing One huge factor I was surprised to see the Behind the Kitchen Door report miss about Philadelphia’s restaurant industry labor market is that the County Quota system hurts restaurant profits, and thus wages. As any waitress will tell you, drinks are a huge tip generator, and more generally provide restaurants with a higher profit margin than what they can make only selling food. In restaurants in normal states, the concept of booze cross-subsidizing the food is core to the restaurant business model. A Philadelphia restaurant market where any restaurant can sell alcohol is a market where servers, kitchen staff, and owners make higher wages. The stupid state law limiting liquor licenses to 1 per 3000 people per County is pointlessly holding down restaurant wages.

6. Regional Tax Bases This is more about redistribution than wages, but PA’s excessive level of municipal government fragmentation is a key driver of inequality, racial and economic segregation, urban fiscal stress and high municipal borrowing costs. In addition to creating stronger exit pressures on cities, balkanized municipal government unfairly cheats central cities out of a higher share of the tax revenue produced by their regional economies. A regional tax base, ideally at the County level or larger, would ensure that wealthier suburban and exurban residents’ earned income tax revenues are part of the tax base for city public services like police and schools.

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