Ticket to Ride: Why Baltimore Must Not Raise Income Taxes

The defense first made for Mayor Schmoke’s recent proposal to up the city piggyback income tax was the small average per-person tax increase that would result, less than $75 a year. This is not the point. Baltimore is not a pleasant enough place to live that it can afford to be making any more tax demands of its residents. People will pick up a one-way ticket out of town. Nor is it the point to say that Baltimore County’s piggyback tax is in fact higher than Baltimore’s current rate. In the county, residents perceive that they are getting something for their money. In the city, they do not.

Tax proponents say that an income-tax increase would not really be an increase at all, simply offsetting the recent small reductions in property taxes and the elimination of the bottle tax. In which case, one must discuss the type of tax, also. Because people have less control over the amount of income they lose as a result of income taxes, as opposed to sales taxes, so income taxes are most heavily correlated with population shrinkage. In other words, people tolerate direct income taxes least of all taxes and will go to greater lengths to flee them. To avoid the bottle tax, people only had to drive to the county. To avoid an income tax, they will move to the county — permanently.

A recent study by the Cato Institute found that in the lowest-growth cities — a category that most certainly includes Baltimore — bureaucrats in 1990 levied average income taxation of $180 for every man, woman and child within the city limits. But they only levied $98 per capita in sales taxes. By contrast, in the highest-growth cities, administrators took only $23 per capita in direct income taxes, but netted $153 per head in sales taxes. Thus, low-growth cities are eight times more reliant on direct income taxation than are high-growth cities, but only two-thirds as reliant on sales taxes. That should tell us something in Baltimore: Direct taxes lead to a narrower tax base.

In 1994, Baltimore City had a net population loss of 10,798 individuals (including dependents). That is almost 1,000 people per month. Hiking taxes can only increase the exodus. It is not just white flight. All across the U.S., middle-class African-Americans are leaving city centers in droves, also. In 1980, 25 percent of black suburbanites had previously lived in the local downtown. By 1990, that figure was up to 33 percent. At Baltimore’s current rate of population loss, by the turn of the century it will have lost a shiny new stadium’s worth of people.

Of course, Washington, D.C. has similar problems, too – high taxes and massive middle-class flight. However, while Baltimore debates raising taxes, the District’s congressional delegate, Democrat Eleanor Holmes Norton, proposes a large tax cut for Washington, in the form of a 15 percent federal flat tax for District residents. Norton knows this is the only way to stabilize the District’s appalling population decline. Baltimore should take a leaf out of her book.

A Tax Hike May Not Mean Higher Revenue

Ah, but what about the lost revenue? Baltimore is very unlikely to recoup all it thinks it is going to, anyway. This is because, faced with increased taxation, people alter their behavior by (a) sheltering more of their income and/or (b) upping stakes and moving. A 1991 study by the New York City Comptroller’s Office estimated that, because of these effects, by 1994 the Big Apple would only be collecting 14 percent of the revenue it had predicted it would get from a 1990-91 tax increase.

Another example: In 1988, before President Bush’s big tax-raising exercise, federal individual income taxation netted 10.1 percent of all personal income. In 1993, just after that hike and the subsequent Clinton increase, federal individual taxes only brought in 9.2 percent of personal income. Why? Because for those earning more that $200,000 annually, taxable income mysteriously decreased by 2.3 percent. Were these people earning less? Of course not. They just altered their investment and income patterns, resulting in less reportable income.

A Cash-Strapped City?

So the thing to do is to look at services, not revenue. It is not as though Baltimore has no funds to pay for services. The problem is that the city cannot afford services at the rate it has been paying for them — a very different matter.

For a start, Baltimore is a bureaucrat-heavy city. In 1990, it had 404 city employees for every 10,000 residents, according to the Cato Institute. This was the third-highest ratio in the country, topped only by New York City and Richmond, Virginia. At 404, Baltimore had 130 percent more city employees per 10,000 population than the average major U.S. city, which had 176 employees per 10,000. (The mayor’s proposed budget for fiscal 1997 indicates that the city had 380 employees per 10,000 in fiscal 1996, though differing methodologies may account for the discrepancy.) In 1990, the city spent $1,288 in federal, state and city funds for every resident. This was 32 percent more than the $975 spent on average.

Let’s look at the recent figures: From fiscal 1993 through 1996, total city expenditure, adjusted for inflation into constant 1994 dollars, increased by 2.6 percent (from $1.87 billion to $1.92 billion). During that period, personnel and administrative spending in the mayor’s office increased by 1.5 percent (from $3.71 million to $3.77 million). Meanwhile, public-school spending increased by 3.6 percent (from $591 million to $612 million). This was during a period when the city shrank particularly fast, by 6.1 percent from 1990 through 1995. More funds were used to deliver services to fewer people.

Somebody had to pay for all this, of course. And it was not just the rich. Taking the 1992 figures for the largest city in each state, one finds that the residents of Maryland’s largest city — Baltimore — experienced the fifth-highest total levels of combined state and local (including property) taxation proportional to income. State and local taxation took 16.1 percent of the income of the average Baltimore working family, defined as a family with four children on a modest income of $25,000 to $50,000 a year. Only the residents of the largest cities in New Jersey (Newark), Michigan (Detroit), Connecticut (Bridgeport) and Rhode Island (Providence) had a larger portion of their incomes taken. Baltimore does not need to be equating itself with these ghost towns.

How to Cut Spending, Not Raise Taxes

The doom-and-gloom scenario painted by the city administration is interesting: The libraries; the recreation centers; the art museum — all these will be severely impacted unless Baltimore’s tightfisted taxpayers come up with some more money. But there is no talk of slashing the city’s bloated bureaucracy. Under the budget proposal, the massive Department of Public Works gets an increase of $4.1 million, an increase of 1.2 percent over last year’s budget. The $757,249 increase in funds for the mayor’s office — 18.9 percent — is over 37 times as large as the decrease Charm City is told its Museum of Art must take.

So let’s talk real cuts. Let’s talk privatization. Let’s talk Indianapolis, Indiana. Since assuming office in January 1992, Mayor Stephen Goldsmith has reduced the number of city employees, exclusive of public-safety personnel, by an astonishing 35 percent. During his tenure, 62 municipal functions have been opened to private bidding. In 1993, Indianapolis undertook the world’s largest ever water-privatization project – which will save the city 44 percent over five years ($64 million). Mayor Goldsmith also tackled public transportation, getting the state legislature to pass a bill allowing him to authorize private bus companies to operate alongside the city vehicles (as has happened in the United Kingdom, with great success). Only the U.S. Congress’ stubborn refusal to eliminate section 13(c) of the Federal Transit Act of 1964 prevented the completion of the project. Section 13(c) mandates that any public-transit employee “negatively impacted” by competition receive six years’ salary and benefits — for doing nothing!

For big-city mayors, the prospect of any privatization is daunting because of this potentially “negative impact” on all public-sector employees. These are a vital constituency for urban politicians. But the fear may be misplaced. Subjected to the bracing air of real competition, city workers can sometimes come out on top. When Mayor Goldsmith took bids for street maintenance in Indianapolis, the city repair shop actually won the contract, having suddenly found possible savings. The city employees discovered that each pothole did not require eight employees on two trucks, as they had long maintained, but that the job could in fact be done with four workers on one truck.

Likewise, in 1978, the city garbage collectors’ union in Phoenix lost every single neighborhood contract when private bids were first accepted in some locales. But over the years, the union — which retained the contract in areas where bids had been prohibited — reformed and by 1989 it had won back every contract in the city.

So, there is hope — hope that local politicians will summon the bravery it will take to allow true reform in service provision. Beating the middle class about the head will not do. Reform is the only hope.

Dr. Munro is the co-director and CEO of the Calvert Institute. He lives in Baltimore City. This paper is adapted from comments made on the “Marc Steiner Show,” WJHU 88.1 fm, Baltimore, Maryland.

Note: Nothing herein is to be construed as necessarily reflecting the views or stated policy positions of the board of trustees or the board of advisors of the Calvert Institute, nor as an attempt to hinder or aid any legislation.

This article may be reproduced in part or in full, provided that due acknowledgement is given and correct citation made, noting it to be part of the Calvert Comment series.

Editor: D.P. Munro
Graphics & Layout: D.P. Munro

Editorial Board:
Sherine H. Centenari
Ronald W. Dworkin
Douglas W. Hamilton, Jr.
Douglas P. Munro

Posted in: Comment, Fiscal