Research Wire

Continued from previous page

Practically speaking, what Inman does in much of his research and consulting is put price tags on the tax and spending strategies of state, local and federal governments. Government outlays — for health care, social insurance, unemployment insurance, roads, education, police protection, telecommunications, etc. — account for 40 to 60 percent of the national economy, he says. Given those figures, it’s clear that the management, or mismanagement, of taxpayers’ money can have a dramatic impact on businesses, consumers, cities, suburbs, school districts and other stakeholders.

In dealing with the 400-pound gorilla of government spending, “the question is how should taxes and debt on the financing side be handled in a way that does the least damage to the private economy, i.e. that will have the fewest disincentives on how hard you work, how much you save, where you live, how profitably you can operate your business and so forth,” says Inman. “I want to minimize those adverse effects and then spend the money in the most productive way possible.”

Suppose the city of Philadelphia wants to raise the non-resident wage tax. “I’ll say go ahead but it will cost you ‘x’ number of jobs,” says Inman. Or suppose the European Union wants to grant Italy unlimited borrowing authority. “I’ll point out that the consequences of that are ‘x’ higher interest rates. In South Africa, suppose the government wants to tax capital income. I’ll say okay but the decision will result in an exodus of capital stock.

“In the end I try to price out the tax side, measure the benefits side and then help decision makers think through the balancing of benefits and costs.”

Seventeen years ago, the city of Philadelphia offered Inman a unique opportunity to showcase his research on public finance. In 1982, at a time when Philadelphia’s taxes were the highest in the region and third highest in the U.S. and when local labor unions were clamoring for ever higher wages and better benefits, Inman was brought in as a consultant to study the city’s fiscal condition. By interpreting available statistical data on Philadelphia’s tax structure, Inman was able to show how spiraling labor costs had forced the city to keep raising taxes, which in turn had helped drive away employers and families, which in turn necessitated even higher taxes, which only added to the exodus, and so on.

Inman did similar studies in 1984, 1986 and 1988, but no one paid much attention to them until the fiscal crisis hit in 1990. “That fall, what should have been a routine borrowing to meet city expenditures until anticipated tax revenues could be collected became an international financial embarrassment,” says Inman. “Potential lenders and guarantors from the U.S., Europe and Japan all refused to lend the city its needed funding.” Philadelphia suddenly found itself facing a budget deficit of $153.5 million.

What had happened? In 1992 Inman, working with the new Rendell administration, was able to document that during the last 12 years, taxes had been raised a total of 18 times and, as a result, the city had lost approximately 125,000 jobs. “We had gone from 900,000 jobs in the mid 1970s to 700,000 by the early ‘90s,” Inman says. Some of those job losses would have occurred anyway due to the shift to a service sector and the demographic trend of more firms migrating to southern states. But the majority of those losses were caused by the tax structure. “We re-documented it in 1994, 1996 and 1998,” Inman says. “We made it very clear that the mess we had gotten ourselves into in 1990 was due to a large degree to rising costs — primarily labor but also welfare — and rising taxes.”

The Rendell administration early on decided that holding the line on taxes, and eventually reducing them, would be a centerpiece of their administrative policy. They specifically zeroed in on two particularly damaging taxes, the non-resident wage tax and the gross receipts tax. Inman showed that the non-resident wage tax caused a number of downtown professional firms to move back-office operations out to the suburbs where suburban residential employees could avoid the tax. He also documented how the gross receipts tax unfairly targeted small companies, many of whom were barely breaking even, because it taxed total sales rather than profits. As a result, many small businesses were moving out of the city or choosing not to locate there in the first place. “Rendell focused on lowering these two taxes, finally pointing Philadelphia’s tax strategy in the right direction,” Inman says.