Strategic Decision-Making Capacity:
Local Government Finance
Political fragmentation causes competition for tax base. Even though retail trade does little to enhance overall metropolitan competitiveness, retail sales tax is one of the components of tax base over which local governments can exert some control. Has this led to too much retail space in our region?
Retail Square Feet Per New Retail Employee, 1995-2005
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To determine whether there is an excess supply of retail space, we measure retail space constructed versus the number of new retail jobs created. The national average square feet per employee for retail is about 900. Space being constructed at rates much larger than this indicates overbuilding.
The rate of retail construction in metropolitan Kansas City is the highest among its peers — 2,200 square feet per new retail employee. This rate is 50 percent higher than Omaha, the most politically fragmented metro, and twice as large as the peer average. If the Kansas City area had built retail space at the average of its peers, it would have saved over $1 billion in construction expenditures between 1995 and 2005. This figure does not include the cost of any associated infrastructure improvements.
Sales Tax Dependency
Percent of Total Local Government Revenue From Sales Tax
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differently, revenues were aggregated across all general and special purpose
units of government, excluding school districts, in each metro.
In addition to the competition induced by our near-even division by the state line and our political fragmentation, the region's over-construction of retail space is partially due to the sales tax dependency of local governments — third highest among our peers.
Sales tax dependency cannot be the full reason, however, because St. Louis and Denver are more sales tax dependent, and just as fragmented, yet they have half the rate of retail construction per new employee.
This suggests that some as yet unmeasured policy variable is having an effect, perhaps differences in the way economic development incentives are used in each metropolitan area. This is the subject of future research.
Cost of Government
Local Government Revenues per Capita, 2002
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The competition for tax base is fierce, in part because local governments try to keep tax rates low. Indeed, on a per capita basis, local government in the Kansas City area is relatively inexpensive, costing approximately $2,000 per person in 2002 — second lowest among its peers.
When all else is equal, a low cost of government positively affects an area's appeal, helping to attract and retain residents and businesses. However, everything is not equal.
Percent of 2000 Urbanized Area Population
Living in Growing Neighborhoods
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Whether public expenditures positively or negatively affect an area's attractiveness depends on how the funds are spent. In fact, the cost of local government is actually inversely correlated with the data on percent of urban population living in growing neighborhoods — people are moving to places where the local public sector is relatively big rather than small on a per capita basis.
In part, this is because people follow a high quality of life, one component of which is the kind and quality of government services. Therefore, it may be more important to keep government service levels high than taxes low.
If so, then such a strategy would also reduce growth pressures in undeveloped areas, allowing local governments to more efficiently maintain those high levels of service in the long run.
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