Here is a snippet of a question sent to me by Gregg after reading yesterday's post (If it creates jobs, it must be good, right?):

I read your blog on the topic above, thought it was interesting and made some good points, and wondered if you have data (your own or other sources) to back up some of your assertions about jobs not contributing to the fiscal bottom line? 

There was much more to his email and he sent me a good article, which I will share later. Very intelligent. Here is how I responded to his question:

Great question, and thank you for reading our stuff.

The short answer is that I do not have data. The longer answer….

I spent a few hours once writing out complex equations for how taxes are collected and the money spent. As a mental exercise this was really helpful. If you are a local unit of government – say a city – you basically have three sources of revenue.

  1. Property tax receipts
  2. Fees and Licenses
  3. Government Transfer Payments

Fees and Licenses are the easiest to deal with. For them, there is typically a service that is associated. For example, a building permit will typically go to pay for the building inspector. Those things tend to be a wash (service costs balance with revenues) and so they don’t contribute to a long-term deficit or surplus.

Property tax receipts are also fairly easy to address. This is what I alluded to in the article….the best approach in theory for a city is to maximize the amount of tax base they have while minimizing the amount of liabilities associated with that tax base. This calculation is true whether or not a job is created in the process.

Government transfer payments are where things get interesting. The federal and state government get money (income tax) whenever a job is created. The state also gets revenue (sales tax) whenever a taxable transaction occurs. Both get revenue when people drive (gas tax). So the incentive for the federal and state governments, in theory, should be to maximize the number of jobs, the amount of wages paid, the number of taxable transactions and the number of gallons of gas consumed.

There really is no direct incentive for federal and state governments to limit infrastructure liabilities taken on at the local level. In fact, if it creates jobs and taxable transactions, there is every incentive for the federal and state governments to encourage cities to take on more liabilities. From a revenue standpoint, it only adds more to state and federal coffers.

Here’s the mystery and the dogma of all of this….many city officials believe that the money returned to local governments in the form of transfer payments is the fruit of all of the local investment. In other words, the city takes on all of this infrastructure, the state and feds get the money from the growth, and then some of it is returned in the form of a transfer payment (direct aid, grants for a project, DOT spending, etc…)

That’s a difficult contention to cling to when a) the state and federal governments are running huge deficits and b) government transfer payments are being reduced. Even if those things weren’t true, it is a terribly inefficient system and really impossible to argue that new jobs create local revenue via income tax paid and then transferred back to the city.

It is possible for new growth and new jobs to improve the financial position of a city, but only when that new growth or new job is in a land use pattern that generates more local revenue than it requires in ongoing expense. So you see, the first thing that needs to occur is that the development pattern needs to be right. Once that is in place, the jobs and growth benefits everyone.

Hope that helps.

-Chuck