Wednesday, December 19, 2012

Regional Income Thresholds for Tax & Spending Policy: Just Don't

Poor and middle-class residents of New York City
have a plethora of leisure & service options that
don't exist in Paducah, Kentucky
The discussion of monkeying with top marginal tax brackets has brought inevitable pleas to change tax brackets based on the cost of living associated with one's primary residence. This also sometimes comes up in questions of thresholds for various income-based subsidies such as food stamps, insurance subsidies, etc, to accommodate the added expense associated with living somewhere that's expensive. Is this a good idea or not? Here I'm going to argue that it isn't. Living in a bustling metropolis is in certain respects a luxury good, even if it doesn't feel like it all the time.

Over the past generation, the price of real estate has sent a strong signal that in metro areas like New York, DC, Seattle, San Francisco, etc., people should be building more housing and more office space. The Rent, as one might say, is Too Damn High. But these cities have some combination of geographic (bodies of water, etc.) or regulatory (nimby anti-development politics) constraints to adding more housing. People want to move there, but they simply can't. Cities that have fewer geographic or regulatory constraints to expansion, such Dallas and Atlanta, and to a lesser extent somewhere like Minneapolis, have experienced much smaller increases in housing & office space costs, even as their metro area populations have increased since the 1980s. Making cost-of-living adjustments distorts the price signals that the first group of cities are getting. If we let people living in high-cost areas pay lower tax rates, then more people will be able to afford living there and there will be less pressure to push down the price of housing by expanding supply. If you want cities to grow, --and it's obvious from real estate prices that lots of people do -- then letting city residents pay lower tax rates perversely makes them less likely to grow in population.

What's more, another reason prices are high in these regions because wages are high in these regions. The upper management of Apple simply can't do their job while living in Indianapolis. They have to be in Cupertino. Factory workers at Boeing (who get paid pretty well) can assemble the 787 in suburban Seattle, but not in Missoula. And while it sounds a little like "trickle down", to some extent service sector wages are dependent on the wages of goods-producing sectors. Someone living in New Mexico simply doesn't have the same opportunity to earn what someone living in New York. Why should urban residents get both better job opportunities and higher tax rates?

Last but not least, residents of a bustling metropolis have a much greater diversity of leisure and serviceswho live in low cost areas. I went to a cousin's wedding in Spartanburg, South Carolina, and we ate lunch pre-wedding at a Thai Restaurant. I think it's pretty neat that a fairly small town like Spartanburg can now support a Thai restaurant. But it was the only one. There are at least three within two blocks of my office in downtown Seattle. There's only one MOMA*, and if I lived in Paducah, Kentucky it'd be a giant pain in the ass to get there. And while it's not universal, cities tend to provide a wider array of social services than rural areas, simply because social services tend to be labor-intensive. The availability of these sorts of amenities don't feel like "luxuries", but for rural residents these amenities simply don't exist. I'm not trying to pooh pooh high school football, gun ranges, drinking Bud Light out of a can, and having breakfast at the local diner, but metropolitan residents have those options and many many more.

* yes, I know MOMA is a chain of sorts these days
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