Taxing Commuters Living Abroad

Governing magazine has a great idea for cities that are hard up for cash: tax suburban commuters. After all, those leeches live outside the city but depend on the city to provide them with jobs. Thus, they should pay a tax for a privilege of working in the city.

Just to make sure they get people coming and going, cities like Detroit also want to tax reverse commuters. That is, they want suburban employers to deduct taxes from the pay of their employees who happen to live in Detroit.

These are both great ideas if the goal is to hasten the fiscal demise of the cities. After all, think how well the cities would be doing if all the employers in the cities moved to the suburbs. The cities wouldn’t have to pay to provide urban services to those employers, but they also wouldn’t collect any property or other taxes from the businesses. Would they be better or worse off? If you think they would be worse off losing those jobs, then a commuter tax is redundant since the city is better off having the jobs without the commuter tax. (The same rationale applies to a reverse commuter tax on city residents who work in the suburbs.)

On the other hand, cities that impose a commuter tax are going to drive at least some jobs into the suburbs. That will leave empty office buildings paying lower property taxes, fewer businesses paying business taxes, and a loss of city residents paying city taxes (since at least some of those businesses’ employees probably lived in the city). That’s going to make them worse off.

Cities that think they can generate tax revenue from anything they see are living in a fantasy world. Speaking of fantasy worlds, a writer over at Politico fantasizes that rail transit will enable Los Angeles to “kick its driving habit.” L.A. writer David Dayen somehow thinks that rail transit has generated a downtown construction boom and soon everyone in Los Angeles will be able to give up their car and ride the trolley, just like in Roger Rabbit (“Who needs a car? L.A. has the best public transit in the world”).
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The innumerate Daven apparently hasn’t noticed that, first of all, there are hardly any jobs in downtown Los Angeles, at least not relative to the entire L.A. urban area. While 20 percent of the jobs in the New York urban area are in downtown Manhattan, less than 3 percent of the jobs in the Los Angeles urban area are in downtown L.A. Many American suburbs have a larger share of their urban area’s jobs than that.

Second, Daven hasn’t noticed that hardly anyone rides L.A. rail transit. According to the Census Bureau’s 2012 American Community Survey, a respectable 6.5 percent of commuters in the L.A. urban area and 10.9 percent of commuters in the city of L.A. take transit to work. But nearly all of them ride buses: only 0.7 percent of urban area and 0.9 percent of city commuters take one of L.A.’s light rail, commuter rail, or heavy rail lines to work.

Compared with Los Angeles, New York is, of course, a rail Mecca. More than half of commuters in the city of New York take transit to work, and five out of six of those transit commuters take a train. But getting L.A. transit’s share of commuting and other travel up to New York levels would require a massive increase in job concentrations as downtown Manhattan has twelve times as many jobs as downtown L.A. Building a few more train lines is not going to entice employers to bring more than 1.5 million new jobs into downtown Los Angeles.

Yet even New York has hardly given up its “driving habit.” For the New York urban area as a whole, transit accounts for less than a third of commuting. Residents of the New York urban area drive an average of 16 miles per day each. While this is less than the 22 miles per day driven by L.A. urban area residents, it is still quite a lot of driving. It would be a mistake to think that happens in New York City or Manhattan alone can be isolated from the rest of the urbanized area; these dense places could not exist without their lower density suburbs.

Its fantasies like this one that get cities into the financial trouble that leads them to think about taxing commuters, a self-defeating tactic because it drives jobs to the suburbs. If cities didn’t spend big on ridiculous projects that benefit only a few, they would be far less likely to have the fiscal problems in the first place. As noted in another article in Politico, datelined the same day as Daven’s fantasy, former L.A. Mayor Antonio Villaraigosa, who persuaded voters to build more rail transit lines in the city, left office in 2013 with the city government basically broke. That’s hardly an example of sound governance.

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About The Antiplanner

The Antiplanner is a forester and economist with more than fifty years of experience critiquing government land-use and transportation plans.

29 Responses to Taxing Commuters Living Abroad

  1. paul says:

    Any writer such as David Dayen who in his article “kick its driving habit” mentioned above actually a fictional movie “who framed Roger Rabbit” as actually telling the story best as to why LA lost its streetcars and built freeways is simply not capable of critical thinking. Interesting that most people are so willing to believe the myth that GM shut down streetcars to make them buy cars. World wide streetcars were built from 1890-1915 after which they became uneconomical compared to buses and automobiles. As streetcar infrastructure wore out and since they were loosing money they were taken out and replaces with buses or, in the US, automobiles. Amazing that so many city planners do not understand this.

  2. LazyReader says:

    New York City had a commuter tax until 1999. In 2009, New York enacted the Metropolitan Commuter Transportation Mobility Tax, a 0.34% levy on payrolls and self-employment earnings in New York City and Nassau, Suffolk, Westchester, Rockland, Orange, Putnam, and Dutchess counties. This tax, known popularly as the “mobility tax,” is not a commuter tax, but is intended to provide funds for the Metropolitan Transportation Authority, which transports many of the region’s commuters.

    Cities like New York or Chicago, drew strength from their size in the past, today thrive largely by being well connected to other cities globally by multiple types of networks, serving simultaneously as transportation hubs, stock exchanges, and cultural centers. But the biggest change has been the rise of selected smaller cities. Some, not long ago relatively inconsequential, are now major players due to their linkages in more specialized networks. For example, much of Miami’s remarkable growth, and its status as a global city, is the result of its role as the primary economic and cultural bridge between North America and Central/South America. The Research Triangle in North Carolina and Silicon Valley in California have benefitted from intellectual linkages among universities and the world wide tech industry that join independent towns like Raleigh and Durham into cohesive urban regions. Even very small towns like Bentonville, Arkansas (estimated population: 33,744) can be influential in the world arena with the help of vast supply-chain networks orchestrated by a major corporation (Wal-Mart) and large inflows of people made possible by a major airport (Northwest Arkansas Regional, nearly 1.2 million passengers in 2006).

    Cities came about in ancient times to shorten ways of doing business. Essentially. And because it was easier to defend a cluster than dispersed settlements. Which brought about culture, etc.

  3. bennett says:

    Governing magazine?!?!?! Is that a Monty Python publication?

  4. letsgola says:

    Villaraigosa killed LA’s budget with bad pension commitments. The transit construction (and operations) are funded by county taxes that voters approved (in the case of Measure R, with a 2/3 majority). Villaraigosa was a huge supporter of Measure R, but LA County’s transit projects have little to do with the City of LA’s budget issues.

  5. Frank says:

    Governing magazine?!?!?! Is that a Monty Python publication?

    *Chuckle*

    As it turns out, it’s widely read…by crooks and thieves.

    The core of GOVERNING’s readership consists of elected, appointed and career officials in state and local government, including governors, mayors, county executives, city and county council members, state legislators, executives of state and local agencies, and those holding professional government positions such as attorneys, public accountants, engineers and educators.

  6. JOHN1000 says:

    Unless I am wrong, commuter taxes were tried in the past and were ruled unconstitutional.
    New York City has an income tax, but it taxes all people who work and/or live in the city-not just those who commute.
    So if a city wants to do this, they have to tax (again!) its already overtaxes citizens.

  7. Sandy Teal says:

    I am confused. I thought the dense living of inner cities were more valuable and much more efficient for transportation and government services than the sprawling suburbs. So why do the government services and transportation cost so much more and require so much more taxes?

  8. jdgalt says:

    City income taxes have pretty much the same effect, and most cities in the northeast US have them.

    The best thing about these taxes is that they’re easy for most people to avoid, by moving away from that city. This is one of many things that have driven new jobs, at least, to the western and southern states.

  9. prk166 says:

    “I am confused. I thought the dense living of inner cities were more valuable and much more efficient for transportation and government services than the sprawling suburbs. So why do the government services and transportation cost so much more and require so much more taxes?” – Sandy Teal

    “The best thing about these taxes is that they’re easy for most people to avoid, by moving away from that city. This is one of many things that have driven new jobs, at least, to the western and southern states” – jdgalt

    Worse, they’ can be avoided with a local move.

  10. prk166 says:

    i think we’re going to see a few cases related to tax jurisdiction hitting the courts. I wouldn’t be surprised to see a few of these cases in the mix. For example, if someone works from home, they’re not commuting. Yet the company they work for may be located in that city with the commuter tax. Chances are the bureaucrats will insist on the tax being paid.

  11. Dan says:

    Governing magazine?!?!?! Is that a Monty Python publication?

    Professional staff at large city, county, state, regional, and nat’l level read it.

    The argument in the article Randal linked to is that cars and their passengers impose wear and tear and emissions and services on cities, but the non-residents imposing costs do not pay for the costs, and thus are free-riders on the cities’ tax base.

    We’re all against free-riding, amirite?

    DS

  12. Sandy Teal says:

    From the curriculum of the A-1 California School of Trucking and Urban Planning:

    The wealthy and efficient inner cities are just desperate to avoid additional wear and tear on their roads by those evil suburban residents. It is not a considered factor that education of kids is often the largest municipal expense, and many people having kids flee to the suburbs and force the suburbs to pay for their 10K+ a year per kid for education.

    Those evil neo-liberal tea party economists that just look at what inner cities do, rather than what they pretend to say, are just being racist and homophobic when they notice that inner cities heavily subsidize projects to draw more suburbans to the inner city. The inner city politicians are just being good liberals when they spend billions of dollars to attract those “free rider” suburban visitors and businesses.

  13. MJ says:

    The argument in the article Randal linked to is that cars and their passengers impose wear and tear and emissions and services on cities, but the non-residents imposing costs do not pay for the costs, and thus are free-riders on the cities’ tax base.

    We’re all against free-riding, amirite?

    There are a few problems with that argument (well, more than a few but I’ll just focus on the most obvious ones).

    1. Passenger cars impose almost no ‘wear and tear’ on pavements. Attempting to recover this cost would be counterproductive, since the cost of administration would likely be higher than the amount of revenue collected. Likewise, central city residents use road outside of their own jurisdiction, so to be ‘fair’ other neighboring cities would have to impose a similar tax. Assuming that emissions are a problem, the best way to address this is through a tax on fuels,m and again this should not be limited to central cities. Burning fuel is the source of the emissions, not the act of commuting. Taxing commuter trips also ignores the fact that most trips are for non-work purposes.

    2. Most central cities already find ways to tax non-residents, mostly through sales taxes. These taxes are typically set at high enough rates that they not only account for any costs that non-residents impose, but also provide a windfall for central city governments. Stated differently, they are set at ‘revenue-optimal’, rather than socially optimal rates. Governments are just milking economic rents.

    3. In many states, central cities receive large amounts of intergovernmental aid from higher levels of government, typically states. In some cases this aid is provided in addition to the revenue cities collect from local sales taxes.

    4. Central cities often increase the rents they can collect (see #2) by making themselves entertainment destinations. This strategy is often pursued with large amounts of spending from higher levels of government (counties, states, federal) on things like sports stadia, convention centers, theaters, and rail transit projects. Non-local users of these facilities not only get the privilege of paying for these projects, but also paying sales taxes on top of this when they visit.

    In short, I think the free rider problem is a straw man in this case. It is just another rationalization for central city government rent extraction.

  14. Frank says:

    “In short, I think the free rider problem is a straw man in this case.”

    Thanks for the cogent analysis, MJ. Also note how some who argue bicyclists aren’t free riders (often using the same criteria you’ve used above) are quick to label commuters and drivers free riders. It’s laughable, and I’d laugh if my circadian rhythm hadn’t been thrown off due to DST shift.

  15. Dan says:

    MJ, are you claiming buying a Subway for lunch twice a week pays for sweeping, traffic lights, snow removal, pothole filling, cops, etc?

    Evidence please.

    Thank you so much!

    Best,

    D

  16. Sandy Teal says:

    Nothing demonstrates the failure of planners more than revealed preferences.

    Do urban centers encourage or discourage people from traveling to the city center because of the wear and tear they generate? Do urban centers encourage or discourage businesses from sourcing jobs in the city because all the city gets from them is a sales tax at Subway? Do urban centers give away millions and billions of dollars to attract visitors and jobs?

    The answer is so obvious that I was going to say that only ignorant and lying posters would pretend not to know that, but that would be rude, so I won’t say it.

  17. Frank says:

    You’re forgetting trips to Starbucks 😉

    But in all seriousness, and a thing called reality, workers spend upwards of $3000 a year on coffee and lunch, which is more than the cost of commuting. And in a place like Seattle, that’s nearly $300 in sales tax per year.

    Oh, and commuters spend hundreds for parking. In Seattle, DT parking runs about 150 a month, plus 10% sales tax, for another $180 in taxes.

    And in the UK, a sixth of wages are spent at work.

    These all add up to a bit more than a twice-a-week $5 Footlong™.

  18. JOHN1000 says:

    MJ writes a well-thought out summary of the issues. Only one mistake – he believes that government-control types have an honest agenda.

    MJ wrote regarding a proposed tax: “Attempting to recover this cost would be counterproductive, since the cost of administration would likely be higher than the amount of revenue collected.” Good point.

    Unfortunately, the government growth lobby would love to create another taxation bureaucracy with more union jobs (and political appointments). So what if it loses money – (1) it sounds good to attack the suburbs and (2) they get more $ and people to control. Win/win for them; lose/lose for the citizens and taxpayers.

  19. prk166 says:

    Dan, they are not free riders. They city has chosen to be the ones providing those services. What they’re doing is more like to me inviting people over for dinner a few times & then turning around and saying they need to pay.

    The city chose to own the streets and provide them as a service funded by state and federal grants + city property taxes. Free riding isn’t a problem; it’s a symptom of the problems with the system those chose. That they’re not trying to change that system shows they’re not looking to deal the problem, they’re just fishing for more revenues.

  20. Dan says:

    I’m still waiting for evidence that twice-a week Subway (and the Starbuck’s, thanx Frank) pays the costs of commuter’s service burden.

    We got half of it with one survey that found wha and a more recent survey that found ~1/2 that amount for lunch. Nonetheless, we haven’t shown the costs to cities and whether the sales tax on food (if a city has one) covers costs.

    That would be the reason for the tax that Randal is despising in this piece, amirite? Costs higher than revenue?

    DS

  21. MJ says:

    MJ, are you claiming buying a Subway for lunch twice a week pays for sweeping, traffic lights, snow removal, pothole filling, cops, etc?

    Most of the costs for those services are occasioned by the residents of those cities, hence they should be the ones paying for them.

    Evidence please.

    Funny you should say that. Neither you nor the author of the Governing article provided any evidence that non-residents were in fact free riding. Shouldn’t the burden of proof in this case be on those who wish to adopt (or in your case, promote) such a tax?

  22. Frank says:

    “I’m still waiting for evidence that twice-a week Subway (and the Starbuck’s, thanx Frank) pays the costs of commuter’s [sic] service burden.”

    Horse/cart, right? As you’ve mentioned “we haven’t shown the cost to cities”. You want evidence that tax covers cost without providing evidence that there is a cost for providing auxiliary services to commuters.

    And it’s not just a sales tax on food. It’s a sales tax on parking and auxiliary items purchased before, during, after the workday. Also consider parking tickets, speeding tickets, and other revenue streams levied against commuters.

  23. MJ says:

    That would be the reason for the tax that Randal is despising in this piece, amirite? Costs higher than revenue?

    No, in principle it shouldn’t. If it were possible to identify an optimal tax on non-residents (that is, assuming someone were able to provide evidence of the costs attributable to non-residents), revenue should be equal to marginal cost.

    Here’s the thing. If a city wants to promote itself as a major employment or entertainment center, they will have to figure out how to pay for the cost of services such a destination requires. It’s not someone else’s problem to figure out.

  24. Dan says:

    If the tax were a burden and commuters paid their way. Randal would have mentioned it. Since it didn’t appear anywhere in his argument, I’m wondering why no evidence was brought forth.

    For example, MJ stated If it were possible to identify an optimal tax on non-residents revenue should be equal to marginal cost.. This is exactly so – cities if they were non-competitive would impose a tax.

    DS

  25. msetty says:

    One tax concept, at least for heavily visited places like San Francisco and the Napa Valley: “transient occupancy tax” (TOT). Probably would work for Niagara Falls, but not Buffalo or places like Fresno.

  26. msetty says:

    Here in the Napa Valley, TOT varies between 13% and 15% depending on the City or whether an accommodation is in unincorporated Napa County. In Arizona, motel, restaurant and similar bills are hit with additional taxes on top of the regular sales taxes, e.g., totaling around 11%. Classic case of taxing foreigners overseas, or at least when they visit your charming burg.

  27. Sandy Teal says:

    Mayors are always going around and saying “We do not want any restaurants or theaters or white collar jobs in this city because of all the wear and tear on our roads from the suburban people that come into the city. Our city people never ever to the suburbs, so why should we do anything that might attract those suburban people, or even worst, attract out of state tourists!”

  28. prk166 says:

    If cities feel non-citizens of the city should pay for the roads or police or whatever they use, then charge them for using them. It’s 2014 + it ain’t rocket science. The fact that they don’t try to charge them for the specific services shows they’re looking to bring in more revenue than just what’s needed to cover those.

  29. Dan says:

    prk, the problem is that if cities charge for services and wear and tear, firms just move to somewhere that they can free ride. The retail businesses established in anticipation of these workers are imperiled if these firms go chase subsidies elsewhere. Charging commuters for their costs isn’t a winning political move.

    DS

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