Few people like to pay taxes, but most of us agree that we would be worse off without any government. Moreover, all taxes distort economic incentives in some way and create undesired and unintended consequences.
The real estate tax has many faults. The amount due for a particular property, for example, often bears little relationship to the owner’s ability to pay. But it is the primary tax we have for financing local government, so we have to live with it in the foreseeable future.
Keep that in mind when evaluating St. Paul Mayor Randy Kelly’s proposals for future administration of this tax in his city. He made his proposals Tuesday as a change to the city charter, which must be approved by voters.
Also remember that the city of St. Paul has no authority over the school district or over Ramsey County. The mayor’s “taxpayers’ bill of rights” would thus cover only a portion of any homeowner’s total bill.
The proposals are not complicated. They include a cap on city spending and require a supermajority of five votes out of seven City Council members to increase taxes. Economists have insights on the first measure but should leave the second to political scientists.
Institutional measures to control spending are not trivial. For many reasons pressures to increase spending always exceed pressures to cut. Local politics is such that council members may silently welcome rules they can invoke to escape blame for disappointing some particular lobby or interest. Requiring a supermajority can be useful.
There is, however, no inherent reason why optimal changes in city spending need somehow to track with changes in some price index. Just as necessary spending in any particular household or business may increase more or less than some particular price index, necessary spending in any particular city does the same.
Part of this is due to the inherent limitations of any price index. People have come to associate changes in the Consumer Price Index with inflation. They also implicitly assume that inflation somehow affects every family, business and unit of government the same. It does not.
The CPI measures changes in the prices of things consumers buy. But the index’s “market basket” of goods and services that households buy is substantially different from those bought by cities. The CPI is a useful indicator of how general price changes affect households. It is a lousy indicator of how the same overall price changes affect cities or businesses.
For example, fuel may make up a much bigger proportion of a city’s budget than that of a household. A city uses gasoline for police cars, diesel fuel for snow plowing and street repairs and natural gas for heating jails, swimming pools and office buildings. As we see right now, fuel prices can change much more than the overall price level.
Limiting overall spending in the face of higher fuel prices may force cuts in very justifiable spending elsewhere by the city. Conversely, when fuel prices drop sharply, as they did in the late 1990s, city spending could increase by less than inflation or even decrease without hurting other programs.
Use a different index, one might respond. There are several other indexes including the GDP Deflator and the Producer Price Index. But these are little more reliable as measure of how general price changes affect a municipality than the CPI.
This somewhat technical issue of finding the appropriate yardstick for inflation and cities is not the only problem with spending capped by changes in a price index.
Circumstances change and as they do, so do the needs of society for public goods — those items that will not be produced in optimal quantities in pure free markets. Public safety is a classic public good. Increases in crime or threats of terrorism may increase the level of public spending that is justified regardless of what happens to overall price levels.
Increases or decreases in the sizes of particular populations, such as immigrants or the elderly, may justify changes in spending entirely apart from how price indexes change.
The proper measure of government spending is what benefit it will produce for society relative to what benefit the same money will provide for society in any other use.
If the social benefit of government spending is less than the benefits created by spending the money elsewhere, then it should not be spent, even if the government budget is not increasing as fast as some measure of inflation.
The practical problem, of course, is that measuring the social benefits of spending in either public or private sectors is very difficult. The data simply isn’t there for easy decisions. That should not, however, obscure the general principle that marginal benefit to society rather than more-or-less-than-inflation is the proper criterion.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.