This post is part of a larger series.
Regional Fiscal Coordination
One of the most significant reforms required to reduce poverty and inequality in Philadelphia is to create a cohesive, unified political region within the greater Philadelphia area. I outlined the issue in this post and this post, and I showed how the Philadelphia area’s almost 400 local governments, dozens of school districts, 11 counties, and four states create an immense challenge. As it stands, every locality is competitively poised against its neighbors, incentivized to undercut other regions to attract economic activity and residents at the expense of tax revenue and services. As long as this system is in place, creating any reforms on the local level will be exceedingly difficult. If one government wants to set a higher minimum wage, for instance, other governments have an incentive to keep wages lower in order to attract businesses. If one government wants to tax businesses, other governments have an incentive to offer tax breaks to attract those businesses. And so on. This creates a “race to the bottom” between all of these competing localities. Further, it allows for tax evasion by relocating, exacerbating inequalities between central cities and suburbs, since wealthier commuters can isolate themselves in enclaves of their own taxes and services while still participating in the region’s economy.
This is likely the hardest part to achieve, since it requires successfully convincing every local government in the greater Philadelphia region to cooperate. I offered several proposals within the current legal framework that could make this possible, and several proposals to change the existing legal framework. The most effective method I found was to create an additional governmental layer for regional governments to voluntarily participate in. It could function similarly to the European Union and other international economic unions. This is incredibly challenging to create, but not impossible.
This post focuses not on how to create this administrative layer, but rather, what fiscal policies to initiate once it is created. In order to prevent the negative impacts of inter-regional competition so that everybody benefits, and in order to mitigate and reduce the impacts of poverty and inequality in the region, at least the following kinds of policies are necessary:
- Regional taxation that is redistributed to local governments based on need;
- A mechanism to prevent local governments from undercutting other governments via tax incentives in order to attract business or residents; and
- A regional minimum wage agreement so that no local government can undercut the wages of another.
One of the core issues with the fracturing of local governments is that it creates tax enclaves that exacerbate inequality between suburbs and the city. Wealthy residents are able to live in isolated suburban communities where they can avoid Philadelphia’s taxes and services. Instead, they pay property taxes to their local government, and the non-resident portion of the City’s wage tax if they work in Philadelphia. The wage tax helps mitigate one aspect of the issue, but there is no parallel for those who are not working in the city limits (or not claiming to work in the city limits), or for property taxes. This allows for extremely concentrated wealth outside of the city limits in the form of property. It also creates a strong incentive for tax evasion by claiming that your employer or residence is located elsewhere. And, since these smaller, suburban governments are separate from Philadelphia’s services and programs, they can create their own government service enclaves, with far better funded schools, streets departments, and so on. In this way, communities directly surrounding Philadelphia are participating in the economy, while isolating their resources for localized benefit.
The solution is a tax that applies to the whole greater Philadelphia region. The question is, what should this tax be applied to, and at what rate? And, how should this tax be structured and implemented so as to not dissuade local governments from joining the cooperative region, since it must be voluntary?
A tax like this could be a low-rate property and income tax that is paid into one pool and then redistributed to each local government based on need. Need could be determined by census data on the poverty rate, median household income, total population, or other similar metrics. This would function much like a fair funding formula for school districts—areas with the highest level of need as determined by statistics receive the largest proportional share, and areas with the lowest level of need receive the lowest proportional share. In practice, this would amount to wealthier regions like Lower Merrion or Elkins Park redistributing resources to areas like Philadelphia, Camden, or Chester.
We would have to be careful that these taxes do not create another layer of flat taxes that burden those who have the least resources, creating a self-defeating scenario. Like my proposals for other taxes, these taxes need to be bracketed and scaled progressively, with considerable standard deductions applied to account for basic income levels.
The most significant challenge is one of self-interest. Why should wealthier regions voluntarily agree to redistribute their resources to areas with less resources? Their reason for existence is essentially to avoid this.
Arguments can be made to show that it would, in fact, be in everybody’s self-interest to implement a regional tax. For instance, we could attempt to make a case that a more equitable region will improve the economy for all by productively including millions who are currently heavily disadvantaged—even if it means paying a regional tax that has an immediate impact on one’s own resources. We could also point to areas of the world that have gone further down this road of inequality, like Brazil and countries in Central America, where the wealthy enclose themselves in gated communities with heavily armed guards. I don’t think anybody among us wants to live in a society such as that, where those who are better off have to constantly look over their shoulder, and those without resources are so desperate that they feel robbery is their only option for survival.
However, I am personally not convinced that these kinds of arguments will have any effect by themselves. Our society has already chosen this path and fought tooth and nail against reform over several decades. The verdict is in: people tend to choose enriching themselves when given the chance, despite any long-term negative impacts on society.
Therefore, incentives must be offered. And, disincentives must be implemented for regions that do not participate. What might these look like? Honestly, I don’t know. But, I still want to advocate for this regional tax as one of the only possible remedies for our immense regional inequality. It is my hope that this research can help spur conversations and ideas.
A second core issue caused by our many regional governments is the incentive to undercut neighbors. This is particularly a problem when it comes to encouraging businesses to locate or relocate. Under our current system of intense competition, large businesses have incredible power to pit each locality against each other locality to offer lower taxes, no taxes, or even grants and other incentives to move operations.
Here is where I think a collective gain can act as a much more powerful incentive. Every region suffers from this constant struggle, and every region stands to benefit from creating a regional agreement to prevent this.
A regional minimum wage agreement
Finally, the fractured governments of the Philadelphia region cause competition for low wages, which creates a “race to the bottom” to offer the lowest minimum wage possible. Even if the State removed its preemption clause that prevents local governments from setting a minimum wage, there is still a high level of incentive to undercut other regions, much like with taxes.
Thankfully, Pennsylvania is the only state in the Philadelphia region that has not increased its minimum wage, so that limits the difficulty of negotiation to mostly the Pennsylvania local governments. Additionally, almost everybody in the region stands to benefit directly from this policy, so the self-interest incentive is on our side with this reform. The largest hurdle remains the same as any legal challenges in Pennsylvania for minimum wage reform, as outlined in another post.
Reforming the State law is a long-term goal. In the meantime, local governments could agree upon quasi-minimum wage policies. For instance, they could establish a wage threshold, and if employers pay below this, they are fined a certain amount. There are creative workarounds to effectively create a minimum wage.
These three areas of fiscal coordination will help to reduce poverty and inequality in the Philadelphia region. The most difficult part is to convince wealthier regions to agree to a tax, and in creating the cooperative region in the first place. This depends upon the negotiating power of local officials, grassroots pressure, and hopefully additional help from the federal government to create a framework for an agreement.