“Although they are run down, many still boast high local taxes. Sadly, this forms a vicious cycle of adverse selection, spiraling tax rates, and underfunding. “
ith the nation’s economic outlook being anywhere from ambiguous to rosy depending on whose forecasts one is reading (and some states being surprised to find themselves awash in cash at the end of the pandemic), for some cities, the specter of a fiscal crisis is looming. The chief culprit: outmigration.
Some larger cities have been notably struggling to retain their populations for a while now. Detroit has been hemorrhaging residents for so long it has shown a willingness to pay people to move there. The city’s population is down 1.2 million residents from its peak in 1950. Chicago is another well known example, down about 1 million residents from its peak.
And, for many others, a sustained exodus is an unwelcome throwback to the post-War era during which deindustrialization and the flight of wealthy residents to the suburbs contributed to the degeneration of big cities’ social and economic environments.
Over the last 30 years, that trend has reversed—at least where certain cities are concerned. Between 1950 and 1980, the population of New York City fell by about 800,000 on net. But between 1980 and 2019, the city packed 1.3 million more residents into its five boroughs. Other heavyweight cities of the modern economy, like Boston and San Francisco, follow a similar pattern. Members of the modern bourgeoisie have flooded into urban cores, often paying a premium to do so. Formerly working class neighborhoods have been gentrified to a remarkable degree by this influx.
What gave rise to this wave of re-urbanization? The most tangible factors are, in my view, political sortition, economic opportunity, and a remarkable increase in public safety. We can dispense with the first two relatively easily: Cities give residents novelty, density, and diversity. These are overwhelmingly the preferences of political liberals, who not coincidentally are more likely to have higher levels of education and are thus attracted to (or suited for) the high-skill work that has come to predominate in these urban areas.
The precipitous drop in crime that started in the late 1990s is more complicated. Several theories with varying levels of plausibility have been advanced to explain the occurrence. At the end of the day, we still are not exactly sure what happened. But what we do know is that there was an unpredicted and universal decrease in violent crime from the early 1990s to the mid 2010s. Between 1990 and 2001, homicides, violent crimes, and property crimes fell across cities of all sizes, but the declines were steepest in larger cities, making them not just attractive places for the middle and upper class to work but also to live.
However, when population growth stagnates or reverses, cities are hard-pressed to scale back spending.
Presently, however, two of three forces are in retrograde, and it is precisely larger cities that are experiencing the greatest population losses. The pandemic induced employers to implement remote work to an unprecedented degree, severely weakening the gravitational pull of large, expensive cities. This may prove more than a temporary state of affairs: The number of remote workers is expected to double by 2025, relative to the pre-pandemic baseline. Meanwhile, crime is rising to the highest levels we have seen this century. Police officers are quitting in droves, as a coalition of mayors are asking the federal government for assistance. The confluence of these factors has sent residents of many cities packing—with big implications for public sector finance.
The Beginning of a Downward Spiral?
Cities do not have many of the fiscal tools available to higher levels of government. They are limited in their powers of taxation—in most cases to levies on property and sales, though a handful of larger cities can also levy income taxes—by their state governments. And unlike the federal government, they cannot run operating deficits or print their own currency.
Ironically, cities that are more dependent on progressive forms of taxation are more vulnerable to financial turbulence brought on by the flight of their well-off residents. New York City residents with incomes greater than $100,000, for example, are responsible for over 80% of income tax liability, though they account for a minority of the city’s population.
A significant and sustained decline in population could pose a serious risk to many large cities’ financial health. Economies of scale make it possible for even unglamorous cities of middling size to raise hundreds of millions of dollars. When their populations are growing, so do their revenues—and their expenses.
However, when population growth stagnates or reverses, cities are hard-pressed to scale back spending. The areas in which they spend most of their money—education, healthcare, and police—are the domains of politically powerful constituencies and, besides that, not areas that lend themselves to skimping.
That leaves only the option of subjecting a shrinking base to an increased tax burden. The United States is dotted with formerly prosperous towns and cities that have been reduced to shells of their former selves. Although they are run down, many still boast high local taxes. Sadly, this forms a vicious cycle of adverse selection, spiraling tax rates, and underfunding.
There is no guarantee that the current trend of urban exodus will endure. There have, of course, been periods of large-scale outmigration in the past from which cities have recovered. However, the risks are real and are worth the attention of local policy-makers and officeholders. The next 30 years of urban life may look a lot different from the past 30.
Eddie Ferrara writes about policy from a data-driven perspective. He studied sociology at the University of Massachusetts Amherst. He blogs at eddiethoughts.com. He can be found on Twitter @EdwardFerrara_