Tax Commission Tuesday: DC’s Economic Competitiveness

July 30th, 2013 | by Jenny Reed

It’s Tuesday, which means a new installment of our weekly series that looks at important research that has been generated by DC’s Tax Revision Commission.  Today’s installment looks at DC’s Economic Competitiveness, based on a paper and presentation by researchers at George Washington University.  They found that DC’s economic competitiveness is driven mainly by three factors: overall employment growth in the DC metro area, the kinds of jobs that are growing, and property crime rates.

The researchers also looked at the impact of DC’s taxes, of course.  Here they found that while tax levels affect employment in the average central city (within a metropolitan area), the impact in DC is modest.  They concluded that greatly reducing taxes in the District would have only a negligible impact on employment – and thus is not a great strategy for growing DC’s employment base.

The study by Garry Young and colleagues looked at data from 1990-2008 for 22 metro areas to pinpoint the factors that drive the ability of DC to promote job growth within its confines.  The authors tested a number of factors, based on existing research and literature, that might influence economic competitiveness.  They found:

  •  Job growth in the metro area leads to job growth within a central city.  In other words, if a region is doing well overall, some of the area’s job growth will locate in the central city.  And it is hard for a city to do well if the region is not. 
  • The kinds of jobs that are growing matters.   Growth in employment in Government and Professional, Scientific, and Technical Services leads to greater job growth in central cities, while an increase in manufacturing employment results in central city job losses.  The author’s note that this likely due to the fact that manufacturing facilities typically require more land which is usually less expensive and available in the suburbs.
  • Higher property crime rates hurt central city employment.  As the author’s note, it’s very likely that businesses don’t want to locate in areas where there is a higher likelihood that they might experience crime.
  • Tax levels matter, but not much given other factors.  The author’s found that an increase in taxes within a central city leads to lower levels of employment. However; when they looked specifically at DC, they found tax changes would have only a modest impact.

The authors then assessed the factors that would affect employment in DC over the next 20 years.  They found that job growth in the metro region, growth in the government employment sector, and low property crime rates can have a large and positive impacts. The growth in the metro region’s employment is particularly important.  For example, a high rate of employment growth in the DC metro area would translate to an increase of 200,000 jobs in DC over 20 years.  

On tax changes though, the author’s didn’t find a big impact on job growth, finding that “In essence, high versus low historic levels of taxation yield only negligibly different employment levels.” (Young, pg. 20).  A steep cut in taxes would lead to an increase of just 4,000 jobs over 20 years, or just one-half of 1 percent of DC’s current employment based. 

Does this mean that taxes don’t matter?  Of course not.  Taxes do matter, which is why DC has established an entire commission to study the issue closely.  But these results show that when it comes to looking at DC’s economic competitiveness and ability to attract jobs, the overall tax level is not a driving factor.

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