Taxation & Estate Planning

Tax Policy Colloquiium, week 9: Michelle Layser's article on place-based tax incentives

 Yesterday at the colloquium, Michelle Layser presented How Place-Based Tax Incentives Can Reduce Geographic Inequality.

There is a degree of consensus (if not 100%) among tax policy scholars that place-based tax incentives - e.g.,  the New Markets Tax Credit or the 2017 Opportunity Zone provisions, which favor business investment in particular areas that are thought especially to need it, relative to investment elsewhere - generally are bad ideas. This is based partly on political economy concerns about doing it properly, but also about underlying views that it will merely shift investment from one place to another with no particular social gain, and that tax benefits to address poverty, inner-city or depressed rural area problems, etc., should be people-based (i.e., go to individuals in need) rather than place-based.

Raj Chetty's recent work regarding mobility and other outcomes, differentiated by zip code, might conceivably lead to rethinking about the current consensus, but it's still at an early stage of being compiled, digested, and understood.

Layser's aim in the paper, is not to defend place-based tax incentives, but to ask (1) what real problems with a geographical component they might actually address, (2) how they ought to be designed in light of those problems, and (3) how well existing place-based tax incentives address these problems. (Spoiler alert: not well at all.) It makes a valuable contribution, including via empirical work regarding Chicago and its worse-off neighborhoods, and here are some of my general thoughts regarding the issues it discusses.

Geographical inequality or geographical deprivation? - The paper's title suggests a focus on geographical inequality. And an interest in inequality often is motivated by equity concerns;. I'd argue, however, that (a) the paper is more about geographical deprivation than inequality, and that its concerns sound very much in efficiency as well as equity.

Suppose that Places A and B both have public parks, but that A's is nicer. This might be viewed as involving geographical inequality, and perhaps as creating an equity case for making them more equal. But that sort of thing is not the paper's main concern.

Now suppose instead that Place B has an oozing toxic waste dump that causes illness and early death to its residents. Once again, B is worse than A but here there is a serious absolute problem, not just a relative one. Oozing toxic waste dumps are both (a) really bad, and (b) not necessarily (until we know more) grounds for site abandonment, as opposed to amelioration.

Whenever a given community has some really bad things going on, or an absence of good things, that suggests the possibility of a huge social return to marginal local investment. (And while relocation may be another option, it may be highly costly.) This potential for a huge social payoff to marginal investment may create a case for place-based or spatial policies.

The paper discusses 3 main types of local problems (all receiving at least some support in the literature) that (in my terminology) suggest the possibility of a high marginal return to local investment. The first is spatial mismatch - the case where communities with potential workers lack convenient access to the places where jobs are. Given jobs' importance to personal and social success, this suggests that there may be positive externalities to connecting the jobs and the people, whether by moving the former or providing better access.

The second is systematic disinvestment, which one might relabel as under-investment that has a bad history and malign causation. Even under-investment alone suggests that there may be initially high marginal returns to putting funds back in to the area.

The third is poor community infrastructure, again suggesting that there may be high marginal payoffs to creating local assets with strong positive externalities.

Place-based policies - Looking beyond the fiscal system, governments of course have place-based as well as non-cash policies. Among other things, they provide public goods and address externalities, often requiring physical investment in a particular space. Thus, one might address spatial mismatch by creating local mass transit facilities (e.g., a metro or rail line with local station). They may combat disinvestment or under-investment by clearing trash, developing lots, furnishing decent housing, etcetera. And they may seek to create adequate community infrastructure, e.g., good local schools and meeting places.

Once one has accepted the case for place-based spending, a further question is that of public versus private provision. If the latter, and if the market hasn't been doing the job adequately, we may consider offering both funding and regulation And once we're offering funding, the ways it could be structured include both direct outlays and the use of tax expenditures.

Public versus private provision turns on classic issues of relative competencies, and the marginal benefits vs. costs of using profit-minded (even if subsidized and regulated) actors. And if we're choosing between direct outlays and tax expenditures, the relevant issues may sound in political economy and optics, along with questions of administrative design. Many of us in the tax policy community may tend towards general skepticism about the use of tax expenditures, based on the frequency of their misuse, but it would be silly to assume that this can never be a good idea.

Bottom line, it's entirely plausible that we might want to use place-based tax expenditures, within the article's definitions, to address the local investment deficits that it identifies and characterizes. One of the article's many virtues is its establishing a framework for evaluating when this might be a good idea, and how such provisions might be structured.

Enlisting the business community - One key feature of tax provisions such as opportunity zones is that they enlist the business communities as allies of the political forces seeking to help disadvantaged communities. The virtue of this is that the people in those communities may need all the allies they can get, if they want to have any hope of influencing legislative outcomes. The downside is that it may lead to cooptation or grifting, with business interests procuring self-enriching policies that have only a fig leaf of ostensibly helping bigger causes. 

There are interesting political economy issues here that might be worth writing about. Just to give three examples from casual observation:

--The political history of Food Stamps suggests that support from agricultural interests was crucial to its political success. It seems clear, however, that poor people did indeed benefit from being given non-cash (but in practice close to cash-equivalent) Food Stamps / SNAP benefits. So this is not at all a story of malign cooptation; rather one of fruitful cooperation.

--Possibly towards the other extreme is the 2017 enactment of Opportunity Zones. Even if these programs have done some net good, which is far from clear, the grifting component appears, at least anecdotally, to have been (unsurprisingly) high indeed. 

--Low-income housing tax credits might be somewhere in the middle. I'm only casually acquainted with the literature, but to my knowledge it suggests that, while things could have been better, they could also have been worse.

Demands on administrative quality - The paper discusses in some detail how programs responding to the 3 main issues identified (spatial mismatch, systematic disinvestment, and poor community infrastructure) would best be structured. In brief, a lot of specific oversight based on careful empirical inquiry would be needed to do it really well. I certainly wonder whether the United States, at either the federal or state and local levels, is still capable of operating a competent administrative state. So much has been willfully destroyed so quickly, and with so little regret or hesitancy by the destroyers. Maybe various states that are either to the north of us or on other continents can still do this sort of thing, but in America we will need to re-learn walking first.

Full post as published by Start Making Sense on October 21, 2020 (boomark / email).