Why Are Some Cities Growing While Others Are Shrinking?

Abstract

Over the last three decades, large cities like Pittsburgh, Detroit, Cleveland, Buffalo, and Toledo have seen their populations shrink, while areas like Houston, Atlanta, Dallas, Tampa, and Phoenix have seen their populations grow rapidly. Examining the policy differences between those high-growth areas and the low-growth ones can provide evidence that may help declining cities reverse their fortunes.

Austin, Texas and Syracuse, New York provide an excellent example of that contrast in experiences. In 1980, they were roughly the same size. The Austin metro area had a population of about 590,000. The Syracuse metro area had about 643,000 residents. By 2007, Austin’s population was more than 1 million larger while Syracuse’s population had been stagnant. That same disparity exists when you examine the growth of employment and real personal income. Another disparity between the two areas is the tax burden. Throughout that growth period, state and local taxes accounted for nearly 13 percent of personal income in Syracuse. The tax burden was only about 9 percent of income in Austin. There are numerous factors other than taxes that can influence the growth of individual economies. However, this is not an isolated example. There is a consistent relationship between low taxes and high economic growth in metropolitan areas, in states, and in nations.

This article details that relationship between taxes and growth for the 100 largest U.S. metropolitan areas. In the 10 highest-tax metro areas, the state and local tax burden accounted for about 12.4 percent of personal income. In those same areas, population grew by 21.3 percent from 1980 to 2007. Employment grew by 40.1 percent, and real personal income grew by 75.5 percent. In contrast, taxes were only 8.3 percent of personal income in the 10 lowest-tax areas. The economic growth in those areas was much faster. Population grew by 64.4 percent, employment by 107.6 percent, and real personal income by 157.3 percent.

The contrasting experiences of Austin, Texas and Syracuse, New York occurred in countless other areas as well. This study provides 14 such additional examples of pairs of metro areas that had similar tax and growth patterns. These correlations do not prove that low taxes have caused the economic growth. There are many other factors that have an important influence on economic growth. Incorporating those factors is beyond the scope of this paper. (However, see Stansel and Swaleheen (2010) and the additional articles by myself and others cited in footnotes 3 and 4 below for numerous examples of articles that do take that approach.) Nevertheless, the experiences of these 30 metropolitan areas provide valuable lessons for distressed areas everywhere. Keeping tax burdens low appears to be an important ingredient in the recipe for economic prosperity. If high-tax, low-growth metro areas like Detroit, Milwaukee, Buffalo, and Syracuse want to be more like high-growth areas such as Dallas, Tampa, San Antonio, and Austin, they should lower their onerous burden of taxation and bring spending under control.

Keywords: Economic Growth, Taxes, Metro Areas

JEL Classification: H7, O40, R11, R51