The Numbers Speak

Last year the City of Xenia management and the City Council discussed the proposed tax levy, and revealed some financial projections for 2010 and 2011. The City is projecting that passing the 28% income tax increase on May 4 would prevent a deficit of $1.45 million dollars for 2010 and 2011, however their own projections hint to the fact that the city budget will again be in deficit beyond year 2011! This means that again, the City of Xenia will most likely come back to the taxpayers asking for another income tax increase.

The fact that future projections indicate further deficits -- despite passage of a proposed levy -- should serve as a clear indicator to Xenia management that the City of Xenia is beyond exhausting its revenue capacity. This is being manifested by folks moving out of town, some other folks avoiding Xenia altogether, and businesses being unable to make ends meet in the city. It is generally thought by politicians that a higher rate of taxation is generally speaking, directly connected with higher government revenues…but to a point. Both economists like John Keynes and economists from the Austrian School have been using a very simple concept to illustrate this relationship, a bell curve called the Laffer Curve. The relationship dictates that at a 0% tax of inflation, there are no revenues for a government entity, and also at a 100% rate of taxation, there will be no revenues generated. The "hill" of the curve is, for lack of a better term, the optimum taxation indicator for a given tax base; any further tax increases beyond this point will have in fact the opposite effect on government revenues, namely a loss in revenue, not an increase.

City of Xenia officials do not seem to be willing to face this reality, which indicates that Xenia is well beyond the bearable taxation point; this fact is again, manifested in lower revenues, and projected future deficits even after passing a 28% tax levy increase!

To support the assertions made above, we will reference a 2003 study of local income taxes, titled "Local Revenue Hills: Evidence From Four U.S. Cities", and created by The National Bureau of Economic Research (NBER Working Paper No. 9686). In this study, four U.S. cities were analyzed for the purpose of determining each city's revenue hill, and the path of marginal tax revenues in relation to tax rates. The four cities were Houston, Minneapolis, New York City, and Philadelphia.

For two of the cities studied, New York and Philadelphia, the increase in local income tax led to job losses, and implicitly to lost revenues for the cities. To quote the study,

In 1970, New York City had 5.28 percent of the nation's jobs. By 2001 it had 2.88 percent. The job situation reflects in part the statistically significant negative effect of income tax rate changes: taxes rose from a top marginal rate of 2 percent to 4.66 percent in 1994 before dropping to 3.592 percent in 2001. The authors predict that the city's total job loss because of increases in city income tax rates would have been 490,000 jobs, but Mayor Giuliani's 1994 tax cuts restored 160,000 of those jobs for a final, tax-induced decline in city employment of about 330,000 jobs.

Similarly, Philadelphia lost 173,000 jobs between 1971 and 2001 because of increases in city wage tax rates. However, the authors estimate that without Mayor Rendell's wage tax cuts begun in 1996, Philadelphia's job loss would have been an additional 30,000 jobs. The New York City and Philadelphia experiences lead the authors to conclude that lowering city taxes is likely to be a cost-effective way to increase city employment.

The study further concluded that,

The recent cuts in New York and Philadelphia's income and wage taxes do mean lost tax revenues and presumably lower public services for city residents, but the added city jobs offer an important compensating benefit. The end result is a smaller public sector, but a larger and arguably more productive private city economy.

One of the more important conclusions was that "balanced city budgets will require the city to hold new spending to the rate of inflation" and that,

The authors' study reveals a fundamental tension between the interests of city public employees, poor households within the city, and city taxpayers. Tax increases unmatched by tax-financed compensating benefits for taxpayers -- whether property owners, consumers, or firms -- will drive those taxpayers from the city. Property values fall, business sales decline, and the city's tax base shrinks. To protect city economies, a dollar of taxes paid must be matched by at least a dollar of public service benefits. That was not the case in any of the sample cities, though nearly so in Minneapolis.

All these basic economic conclusions are after all, common-sense conclusions, and someone should not have to point them out to anyone at Xenia City Hall. We can readily observe that property values, jobs, business presence and income levels are all in a decline in Xenia, all proving that Xenia cannot be taxed any further without worsening the effects on government revenues. It is an economic reality that taxation will lead to behavior adjustment by those who are being taxed, so it is natural to conclude that the proposed tax levy will in fact lead to further deficits in Xenia's budget by the way of residents leaving the city, and so on. The City's own budget projections prove it.

So the question Xenia residents need to ask is: how much money will the City ask for again in a few years, when the next deficit rears its head?