With city income tax, is Seattle the next Detroit?

Just like the Motor City, Seattle is implementing a city income tax. That doesn’t mean we’re in for a Motown swoon.

With the Seattle City Council unanimously passing a 2.25 percent tax on income higher than $250,000 a year for individuals and above $500,000 for couples, some are seeing an ominous echo with America’s greatest failed city.

For example, Thomas Richards of Lynnwood wrote in a Letter to the Editor, “In the 1960s Detroit instituted a city income tax. Two percent on residents, one percent on commuters. Seemed like a good idea at the time. But as leases expired, CEOs, attorneys, CPAs and other business owners decided that commuting and paying city taxes were avoidable. Businesses left the city in droves. Detroit suffered.”

In 2013, a Forbes magazine contributor argued that the tax was “a key contributor” to the city’s decline into bankruptcy. By providing an incentive for workers and businesses to move to the suburbs, the tax created a “vicious cycle of collapse.” This is a mainstay of conservative advocacy and even beyond.

In fact, taxes (which were much more broadly applied in Detroit) were more a symptom of the city’s trouble than the cause. The Detroit Free Press produced an excellent explanation of the fiscal history, which set the table for bankruptcy decades before it happened. Causes included overborrowing, mismanagement and a botched “reform” of city pensions. The state disastrously reduced revenue sharing. Taxes played a part, but more as a reaction to declining revenues from white flight into suburbs subsidized by freeways, FHA loans and served by the Motor City’s most important product.

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Detroit’s biggest problems were race and class. This is the 50th anniversary of the catastrophic riots that left 16 dead and required the intervention of the National Guard and elements of two regular Army Airborne divisions. White flight accelerated. In many ways, much of the city never recovered. Racial antipathy and violence had a long history in Detroit, too, including riots in 1943 when whites resented blacks getting factory jobs. But class was at work, too. Middle- and upper-class blacks followed the exodus to the suburbs in more recent decades.

Finally, Detroit’s fortunes were damaged by the Big Three’s troubles as imports began to take market share. Factories closed. Broader Rust Belt decline hit other manufacturers and railroads, all big employers, but almost all somehow tied to the auto industry. Without an adequate transit system, Detroit’s inner-city poor couldn’t reach new employment centers in the suburbs, perpetuating poverty, crime and resentment.

None of this applies to Seattle. I’m skeptical that the income tax will be effective, particularly depending on how the revenue is spent. It will do little to affect the real problems: Washington’s lack of progressive taxes and the decline of a progressive federal tax system. The city’s tax may not even survive in court.

Detroit is out of the worst. Population decline continues overall, but this may be a good thing — population brings carrying costs. The metropolitan economy remains one of the strongest in the nation and it has diversified. Downtown has made an impressive comeback, even adding residents in recent years. General Motors’ headquarters is still in the city.

The better place to look for blunders and best practices is San Francisco. You’ll find plenty about which to argue.


Today’s Econ Haiku:

Robots on Wall Street?

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Job terminators


 

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