Assignment for Persky-Haydar Kurban reading
1. Distinguish between cost-reducing contributions by the Federal government and transfer payments by the Federal government in their impact on investment and wealth.
2. Given your answer to the first question, why do Persky and Haydar believe that the Federal government gives more help to the suburbs than to cities (despite the fact that the Federal government spends more in Chicago than in its suburbs)?
Ill. FEDERAL SPENDING ACROSS THE CHICAGO URBANIZED AREA A. In the aggregate, the City of Chicago received more federal funds per capita than its suburbs. Over the period 1989-1996 the federal government spent an average of $4590 (excluding loans and subsidized insurance) per capita in the Chicago Urbanized Area. These expenditures increased by about $420 (in 1996 constant dollars) from the first half to the second half of the period. As has been noted for several other metropolitan areas (Parker, 1995, 1997), per capita federal expenditures in the central city of Chicago were consistently higher than those in the city's suburbs (Figure 1 and Map 2). Moreover, this difference increased in real terms between the two periods, 1989-1992 and 1993-1996. Figure 1: Per Capita Average Annual Federal Expenditures in the Chicago Urbanized Area, 1989-1996 $8,000 $7,000 $6,000 $5,310 $5,000 $4,322 $4,621 $4,000 $3,261 $2,744 $3,000 $2,000 $1,000 $0 City Old Suburbs Middle Suburbs New Suburbs Satellites (Pre-1950) (1950-1970) (Post-1970) Federal expenditures per capita are higher in the central city and fall at a fairly steady pace from city to urbanized edge. Only in the older satellites does the per capita figure rise again. These data seem to support the notion that new suburbs receive relatively little direct support from the federal fisc. However, such a conclusion would be misleading. To understand the fine geography of federal spending we must consider the programmatic composition of these figures. B. While the City of Chicago received the bulk of the poverty-relieving programs, the wealth-building programs are strongly pro-suburban. Table 4 presents a summary of our data by ring and major program area for 1989-1992 and 1993-1996. The two tables are quite similar. On the surface it is easy to see support for the possibility that the federal government in the George Bush administration was engaged in a "stealth" 11urban policy (Parker, 1997), substituting transfers and medical payments for direct grants to city the municipalities that house them. The "other" group, consists mostly of grant expenditures and governments. The point seems particularly telling with respect to the comparison of the city proper favors the city, with its concentration of universities, but accounts for relatively few dollars. and the newest suburbs on the periphery. Total federal expenditures per capita in the central city were about 66 percent higher than in the newer suburbs, those which joined the urbanized area The spatially-related poverty relieving programs are similar to transfer programs and these between 1970 and 1990. favor the city proper. These expenditures are again driven by concern for low-income populations, and those populations have been historically concentrated in the city. As suggested above, some Table 4: Average Annual Per Capita Federal Expenditures: 1989-1992 and 1993-1996 capital is accumulated as the result of these dollars spent on low-income housing and related programs. But that capital remains highly focused on serving the needs of the poor and may inhibit 1989 - 1992 City Pre - 1950 1950 -1970 Post-1970 Satellites private investment for other purposes. Spatially Related Programs - 267 631 642 656 340 Cost Reducing The spatially-related cost-reducing programs demonstrate a pattern quite different from Spatially Related Programs - 76 Poverty Relieving 370 53 92 144 those of all the other categories. In particular, these spatially related expenditures are strongly pro- c Non-Spatial Redistribution 1229 290 192 194 371 suburban. Within the suburban groupings, federal expenditures per capita are evenly distributed. d Retirement 2118 2379 1281 1171 1679 We find both old and new suburbs showing per capita federal expenditures far more than twice e Salaries And Procurement 842 689 957 579 2045 those of the central city. Somewhat surprisingly, the inner suburbs here do almost as well as those f All Other 111 86 47 15 39 joining the urbanized area since 1970. However, the older satellites are much closer to the central 1936 4151 3172 2708 4618 city in per capita expenditures. Total In the next subsection, we dig deeper into the most important wealth-building category to 1993 - 1996 City Pre - 1950 1950 -1970 Post-1970 Satellites investigate what is behind the strongly pro-suburban nature of these federal programs. Spatially Related Programs - Cost Reducing 259 649 649 650 375 C. When comparing wealth-creating spending, the central city outpaced other areas Spatially Related Programs - 447 65 42 96 166 in transit and other infrastructure spending, while the suburbs benefited Poverty Relieving c Non-Spatial Redistribution 1696 384 266 263 487 overwhelmingly from the homeownership tax subsidy. d Retirement 2348 2655 1409 1276 1776 By considering the programmatic composition of this category, we can isolate the origins of e Salaries And Procurement 791 658 931 462 1765 this strongly pro-suburban federal spending pattern. Table 5 gives a more detailed breakdown of the f All Other 142 52 33 56 spatially related programs that reduce costs in the suburbs. Total 5684 4493 3350 2779 4624 All figures in 1996 dollars But this "stealth policy" fails to extend to wealth-building programs. The bulk of the difference between expenditures at the core and periphery result from substantial differences in per capita expenditures on the two largest program areas, direct redistribution and retirement, programs that support the old and the poor. The "advantage" of the central city and virtually all the advantage of the oldest suburbs are attributable to the concentration in those locations of transfer expenditures for income support. As noted above, such expenditures do little to encourage wealth building. The spatial distribution of federal salaries and procurement are disproportionately concentrated in the satellite towns, largely because of the military installations located there and the Fermi National Accelerator Laboratory. The newest mostly residential suburbs receive fairly little of these kinds of funds. These expenditures undoubtedly contribute to the general economic activity of 12 13Table 5: Average Annual Per Capita Federal Expenditures: from earlier investments. However, the policies and programs that put the existing Spatially Related Programs - Cost Reducing, 1989-1992 and 1993-1996 expressways in place are long gone. To give a clear picture of policy today we had little choice but to put aside these early expenditures and focus only on current dollar flows. 1989 - 1992 City Pre - 1950 1950 -1970 Post-1970 Satellites Highways and Related 22 50 60 92 44 Public Transit 73 37 26 20 16 By far the most significant program area is the federal income tax subsidy of owner-occupied Other Infrastructure 36 5 2 0 1 housing. While the return on almost all other investments must be declared as income and taxed Income Tax Subsidy for Housing 125 536 554 538 275 home owners are in effect allowed to underreport their non-earned income." In the suburbs, these Environment and Disaster 2 7 4 Crime 0 0 0 0 housing related tax expenditures per capita are much larger than in the city. A suburban family of Total 267 631 642 656 340 four receives about $2200 a year while a city family of four receives about $500. The difference comes about for three reasons: higher home ownership rates in the suburbs, higher incomes in the 1996 City Pre - 1950 1950 -1970 Post-1970 Satellites suburbs, and higher housing values in the suburbs. Between the three rings of suburban Highways and Related 25 55 65 54 municipalities, we find no significant differences, although more detailed data by individual Public Transit 70 35 22 16 14 municipalities show considerable variation related to income levels (see Map 3). The richest third of Other Infrastructure 11 2 0 0 municipalities have an average subsidy of almost $4000 per family of four. Income Tax Subsidy for Housing 125 556 560 552 301 Environment and Disaster 1 4 ON Crime 21 0 0 1 To measure the tax expenditure involved in leaving these imputed incomes untaxed, we Total 259 649 649 375 need to estimate two critical parameters: the rate of return on housing capital and the applicable income tax rate. As to the first we make the very conservative assumption that in all communities As the data suggest, the federal government's role in providing infrastructure (other than for housing capital pays a real rate of return of 5 percent per year. We put aside here issues of capital transportation), environmental assistance and anti-crime expenditures accounts for relatively modest gains and inflation and in effect treat housing as an asset held in perpetuity. This 5 percent rate is sums on a per capita basis. Even more surprising, is the relatively small contribution of highway and applied to owner-occupied housing as reported in the 1990 census. Marginal tax rates were related programs to the overall total. Even in the new suburbs of the urban periphery we estimate computed separately for each housing value category in each community. that only about $85 per capita was spent annually on this subcategory, and in the city the figure falls It might be objected that the housing tax subsidy does not really affect locational costs. For to about $25 per capita. any given household owning a unit of a specific value, the same housing tax subsidy applies throughout the urbanized area. However, such a conclusion fails to take into account supply Two observations should be made in connection with these statistics: differences at the periphery and the center. At the edge of the urbanized area, land supply is First, we have tried hard to ascribe to households in each municipality their share of highway bountiful and subsidies reduce real costs of acquisition. At the center of the city, subsidies are far expenditures based on use of the highway expenditures made over this period. This means more likely to be capitalized into housing prices, and hence new home buyers gain little real benefit. that a town's allocation of highway expenditures doesn't depend on how many highway dollars were actually spent within its borders, but rather on the journey-to-work miles its commuters made over highways constructed, improved or maintained with federal funds in each county. `These estimates start from the longstanding tenet in public finance that various types of investment income should be treated similarly for tax purposes and, in particular, that implicit income from owner-occupied homes rightly should be taxed. From this point of view, mortgage deductions are perfectly appropriate as a Second, these estimates relate only to expenditures actually made in the eight-year period. cost of engaging in a "home" business, as long as the net income generated by that business is fully taxed The Chicago area has not had significant highway construction since the early 1970s. Much (Musgrave and Musgrave, 1980, p. 359-361) Because of problems in implementation, taxation of imputed earnings from investments in owner-occupied dwelling has not been common among the countries of the of the expressway system originally planned for the area was never actually built. Still, there world. However, both the Netherlands and Canada have actually implemented such taxation policies. We is a sense in which current commuters and other highway users are benefiting from previous also note that the dollar figures we come up with using this method are quite similar to the federal tax subsidy capital expenditures. One could make a case for considering the ongoing flow of services implicit in deductibility of mortgage interest (Gyourko, 2001). Finally, we do not estimate the value of the property tax deduction on personal federal income taxes, since we are treating housing as a business investment, and such a deduction would be appropriate before taxing business income as profits. Through the Public Use Microdata Sample of the 1990 Census we estimate for each housing value category in a "We use commuting miles because traditionally the capacity of a highway system is only seriously municipality the income distribution of owning households in that category. For more details see the challenged during peak use. For more details on our modeling see the Appendix. Appendix. 14 15From this perspective the estimates in Table 5 overstate the potential investment cost subsidy and IV. SUMMARY hence the incentive effects of the subsidy in the city and, for that matter, in the older suburbs. Federal expenditures on programs that affect the cost of residential investment in the city of As noted above, all the other program categories included in the group can be viewed as Chicago and its suburban rings, strongly favor the suburbs, and most strongly favor the periphery reducing the local tax prices of public goods complementary to residential investment. Federal where the elasticity of housing supply is greatest. This conclusion is based largely on the impact of dollars allow local governments to reduce their tax rates and hence to reduce the effective price of the income tax treatment of housing. At the periphery, the high elasticity of housing supply turns the home ownership. In the Chicago region, annual federal subsidies for highways and public transit structure of federal income taxes into a massive housing program, the equivalent of a blank check come to about $100 per capita.5 These rather modest expenditures are surprisingly uniform across for residential investment. To a more limited extent, federal spending has encouraged wealth- the area. The pro-periphery highway spending is just about equaled by the pro-city public transit building in the city. But these federal funds have been highly focused on housing programs and expenditures. The city does much better than the rest of the urbanized area because city residents infrastructure specialized in meeting the needs of the poor. Together these observations implicate make extensive use of the Chicago Transportation Authority. It is likely, however, that these are not federal policy in the decentralization of population and the concentration of urban poverty that have completely comparable investments as there are disparate impacts of highway versus transit characterized the recent history of the Chicago metropolitan area. spending - particularly in terms of impact on land development and economic activity. The welfare implications of our results depend heavily on the extent to which decentralization Other infrastructure expenditures do favor the city, but are quite small. Again, these and poverty concentration generate net costs for the metropolitan area. Of course, these questions expenditures are included here because they reduce local public costs and hence the effective price are themselves major subjects of debate. We read the considerable research literature as of residential location. The two remaining subcategories are environmental spending and crime suggesting that the pace of decentralization in recent years has had highly unattractive distributional prevention subsidies. Like infrastructure subsidies, both of these substitute for local public costs. impacts with no positive effect on overall efficiency. (Persky and Wiewel, 2000). Under this For this period, neither is very large. interpretation, the data presented here support a major reconsideration of the income tax treatment of owner occupied housing. At the very least, our results suggest the usefulness of viewing federal expenditures in terms of their influence on wealth building across the metropolitan area. Hence, we argue for an extensive revision of federal statistics along the lines of the present study. Small area data on the character and federal spending can play a significant role in encouraging accountability and facilitating debate. Two observations should be made in connection with the highway estimates. First, we have tried hard to ascribe to households in each municipality their share based on highway commuting use. Thus a highway expenditure in a particular locale is not allocated completely to the residents of that locale, but rather is divided among all municipalities in proportion to their commuting use of that highway. In particular, this means that suburban commuters are credited with a portion of highway expenditures in the city of Chicago. A similar methodology was applied to public transit. 16 17
