Putting economic theory to the test
UC study finds cutting local taxes cuts household income
Voters might think less taxes would equate to more money in their pockets, but a new study shows that at the local level, the opposite may actually be true.
Economists and politicians have weighed the benefits of different theoretical models for years, but a lack of direct, empirical evidence showing the macroeconomic effects of fiscal policy has made it difficult to argue for or against government funding at the local level.
That’s why University of Cincinnati economics professor David Brasington, PhD, published a new study called “Fiscal policy and economic activity: new causal evidence” in the Scandinavian Journal of Economics. By examining decades of levy renewal data across the state of Ohio, the study estimates the impact of property taxes on income beyond theoretical projections.
“We wanted to see for this study: What is the change in household incomes as a result of voting to cut taxes and public services,” Brasington said. These public service taxes go toward local services such as road repair, police funding and sewage maintenance.
“You may get a temporary personal benefit from a reduction in taxes, but once the effects of the decrease in services take hold, there could be negative economic consequences bigger than the tax savings you benefit from,” he added.
Sound familiar? Brasington also recently published research looking at the impact of these same tax levies on commercial real estate. Using the same novel research method, he found that businesses can benefit from these local-level taxes.
Local city service taxes help with park upkeep, road maintenance, support for local fire departments and much more. Photo/Jay Yocis
His research examining household incomes echoes a similar sentiment. Cutting city service taxes, like public servants’ salaries and road repair, correlates with lower incomes.
“Maybe there’s overspending at the state level, maybe at the federal level. But at least at the level of local government — townships, villages and cities — it seems to be that renewing taxes has more favorable economic outcomes,” he said.
This study examines the median incomes of communities that vote to renew current expense tax levies against communities that vote to cut them. Brasington combed through over 4,000 levy renewal votes in villages, towns and cities to see where the money flows when levies get renewed — and who gets burned the most when they don’t.
“What we found is that cities that voted to cut taxes and services had a decrease in incomes up to two years after the vote,” Brasington said. “This was especially true for lower-income communities.”
His research shows that one year after the vote, cities that fail to renew current expense tax levies have $7,020 lower median family incomes than cities that successfully renew. That trend continues for about two years as the local economy adjusts to the “shock” of less government spending.
“Only the largest central cities in Ohio give welfare,” Brasington explained. “Everything else is at the state level or federal level.” For most of the municipalities he looked at, welfare was not even a factor.
“So it’s not just the fact that local governments can give less directly to their citizens,” he clarified. “There really seems to be some sort of economic effect on the city.”
Local research, national impact
The results could have huge implications for fiscal policy nationally. Brasington noted that because of Ohio’s socioeconomic landscape, it serves as a lens into what the direct impact of city taxes across the country could look like.
With three metropolitan areas of about 2 million people each, small farming communities and manufacturing towns of all sizes, Ohio is a microcosm of the country. “Economically, politically and geographically, it is hard to think of a state more representative of the United States,” he wrote in his research.
Ohio is our home
The University of Cincinnati drives Ohio's economy with a $22.7 billion statewide impact, supporting over 125,000 jobs. Through innovation, research and workforce development, UC fuels economic growth and enhances quality of life across the state.
Featured image at top of sprouts growing from jars of coins. Photo/Adobe Stock
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