Tuesday, February 09, 2010

Tax Cut Boondoggles

Pittsburgh has had its share of boondoggles. We could debate which projects qualify. Anyone want to argue that Pittsburgh is boondoggle free? From boomtown to backwater, there are many monuments to government waste. No state is immune.

I want to expand our understanding of boondoggle to include tax cuts and other forms of paring government revenue. Pay no attention to libertarian orthodoxy. Not all tax cuts are created equal. Some are bad. I doubt Sarah Palin has enough room on her hand to cover all the nuances.

Clearly the city has been unable to pay for just its annual operating costs from concurrent tax revenues for most of the last decade. Many believe that the city's structural deficit can be traced to the 11/4 percentage point decrease in the city's wage tax in 1988. Supporters and opponents of that tax cut debate whether it was prudent given the fiscal realities of the city at the time. Both sides forget the intended purpose of that tax cut.

Going back to the Caliguiri administration, if not much farther, there was a clear concern with the out-migration of city residents to other parts of the country and suburbs within the metropolitan region. The future of the city seemed to be tied directly to a decrease in the wage tax and the retention of younger workers that are most affected by it.

The proposal put forth by the Masloff administration never was intended as a unilateral lowering of the wage tax but a more comprehensive tax-neutral program that included a complementary increase in property taxes. It was only at the last minute that the wage tax reduction was approved but follow-up legislation to increase the property tax was defeated. A fundamental error was not the tax reduction itself but the selective implementation of the mayor's original proposal.

It is ironic that what was thought of as a key policy to keep people from leaving the city — shifting taxes from wages to property values — is now the opposite of most tax reform proposals. The lack of a clear answer about what version of tax reform is best highlights the difficulty of sustainable urban public finances for Pittsburgh and other cities.

What may be surprising is that local police and fire department expenses per capita for Pittsburgh are not terribly out of line with other similar cities around the country. But the revenue to pay for those and other services is clearly lacking. And for Pittsburgh a key dilemma is how to deal with a legacy of debt incurred from a population that, for the most part, has retired or left for elsewhere in the state or farther.

I'll summarize. A tax cut was proposed to plug the brain drain. In 1988. How's that taxy slashy treatin' you, Pittsburgh? The supposed relationship between migration and taxes is retarded.*

*That's satire.

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