City dwellers bear disproportionate federal tax burden

Live in an expensive city? Think you pay too much in federal taxes? If so, a study in the current issue of the Journal of Political Economy finds that you're exactly right.

According to David Albouy, a University of Michigan economist, workers in expensive cities in the Northeast, Great Lakes and Pacific regions bear a disproportionate share of the federal tax burden, effectively paying 27 percent more in federal income taxes than workers with similar skills in a small city or rural area.

Why the disparity? Workers in cities are generally paid higher wages than similarly skilled workers in smaller towns, so they're taxed at higher rates. That may sound fair, until one considers the higher cost of living in cities, which means those higher wages don't provide any extra buying power. The federal income tax system doesn't account for cost of living. So the effect is that workers in expensive cities like New York, Los Angeles and Chicago pay more in taxes even though their real income is essentially the same as workers in smaller, cheaper places.

The extra burden wouldn't be so excessive if more federal tax dollars were returned to urban areas in the form of higher federal spending. But according to Albouy's research, that's not the case. His data show that more federal dollars are actually spent in rural areas, despite the fact that cities send far more cash to Washington. The net effect of all this is a transfer of $269 million from workers in high-cost areas to workers in lower cost rural areas in 2008 alone.

Over the long haul, Albouy says, the larger tax burden causes workers to flee large urban centers in the Northeast and settle in less expensive places in the South. So to some extent, it may have been the federal tax system that put the rust on the rust belt.

Detroit is a perfect example of a city that gets the short end of the stick.

"With its high wage levels, Detroit was, until recently, contributing far more in federal revenues per capita than most other places for over one hundred years," Albouy said. The recent federal bailout to Detroit automakers "is peanuts relative to the extra billions the city has poured into Washington over the 20th Century."

One expensive area that escapes the higher burden is Hawaii. Costs in Hawaiian cities are high, but wages remain low because people are willing to accept lower pay to live by the beach. As a result, Hawaiians aren't pounded by taxes the way New Yorkers are. But it also means that "powerhouse cities like New York indirectly subsidize people to live in really nice locations like Hawaii," Albouy said.

Albouy's analysis adds new empirical weight to a debate that started in the 1970s with the late New York Senator Daniel Patrick Moynihan. Moynihan commissioned a series of reports that showed the Northeast and Midwest sent far more money to Washington than it got back. Albouy's research is the first to provide an estimate of how much more individual workers in cities pay.

Albouy says that city folk shouldn't expect relief from this system anytime soon.

"Highly taxed areas tend to be in large cities inside of populous states, which have low Congressional representation per capita, making the prospect of reform daunting," he writes.

More information: David Albouy, "The Unequal Geographic Burden of Federal Taxation," Journal of Political Economy 117:4, August 2009.

Source: University of Chicago (news : web)

   

• LostInTime - Aug 21, 2009
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  So people who earn more (as a general group regardless of location) are expected to "pay their fair share" and have a higher tax burden, but it isn't fair to have people who earn more in certain cities to pay more?
  
  I thought the argument was that people who earn more are to pay more to make up for those that earn less. I guess it is only fair if others pay. The poor & middle class are much more likely to benefit from their federal tax dollars (assuming they pay any income tax at all) and are more numerous (so they have a greater representation too), yet it isn't seen as unfair that a very large percentage of people effectively pay no income tax.
  
  I realize the difference is the spending power, but people in larger cities also get benefits that others don't. There is no mass transit, poorer access to certain technology (things like cell phones), and a smaller police & fire force covering a larger geographical area in rural areas. Also, if there is a natural disaster what gets more attention, a large city or a small town? I think hurricane Katrina answered that.
  
  As for the representation per capita, that isn't anything new. It was set up like that on purpose to prevent the more populous states from becoming too powerful at the expense of the least populous states. That's why we count the Electoral Collage instead of a popular vote. If we didn't do it that way then states like Wyoming would never see a presidential candidate nor would they ever receive any federal tax dollars.
  
  Disclaimer: I'm not a wealthy person and wouldn't fall into any definition of "the upper class". I also live in a "rust belt" city.
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• PaulLove - Aug 21, 2009
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  In effect what they say is true in that they calculate it per capita due to the difference in wages tax payers will pay more in high cost areas. I would be interested to find out exactly how the federal dollars spent are calculated and which items were included. Although to be fair building a highway across Kansas probably cost relatively more than building one across say New York simply due to size. This expense is only important if the million or so folks in new york want to eat.
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