Friday, February 5, 2010

Testing the Tiebout hypothesis as local government disinvests in services-UPDATED

Since the economy is ravaging local tax collections many cities and counties are cutting services. In some ways the service cuts are changing the fundamental aspects of what local government provides, and once these changes are made who knows what the new equilibrium (or "status quo") will be for demand for services. Of course, the fact that these governments have to continue to pay for labor and pension agreements (plus other contractual obligations) into the future means that there is little hope of a corresponding tax reduction anytime soon. Which brings us to Charles Tiebout, who wrote a piece published in 1956 entitled "A Pure Theory of Local Expenditures."* Tiebout posits that local governments will spend on bundles of services that will attract residents and businesses. Because preferences are heterogeneous, the bundles supplied will be, too. This is why neighboring cities offer different public services such as parks, schools, police, etc.

So what will happen in Michigan now that they are converting some paved roads to gravel? This is a downgrade in service provided. As is what is happening in Colorado Springs, where voters turned down a request for new taxes and will now face dramatic service cutbacks. These types of debates about how to best supply public services within the tax constraints enforced by the voters are happening everywhere. Will people from Colorado Springs move to neighboring communities where the tax and service bundle is more appealing or will they raise revenue to pay for what they value? Will the neighboring cities invest in what Colorado Springs is letting go in order to provide a more attractive bundle of services? Will Michigan counties be harmed economically because they have lower quality but cheaper roads? Perhaps cities will disinvest in the services valued by families, which are expensive, and rather spend that money on services favored by commercial enterprises, which are relatively cheap. These are big questions and how they are answered could shape our cities for generations.

UPDATE: Another way cities can compete is by coming up with more efficient and clever ways to supply services. Here is a story about Tokyo offering some services through 7-11. Talk about convenience!

*Tiebout's piece, as noted in the title, was about spending. It was not about raising revenues or taxation. His idea has since been expanded by many to include taxation as part of the local services bundle, but that was not in his original work.

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