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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Governments in Beautiful, Fun Places Can Get Away with Higher Taxes



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They can get away with it up to a point. 

Steven Malanga at Public Sector Inc. draws attention to a study that I’ve been eagerly awaiting for a long time:

[A] new paper by economists Jan K. Brueckner and David Neumark of the University of California, Irvine, argues that traditional labor theories don’t account for the pull that natural amenities have on citizens, making them willing to pay a premium to live in places deemed more desirable. This attraction, the economists find, accounts for the fact that public sector wages are further out of line with private wages in some states than in others. Not surprisingly, California is a big loser.

“The presence of local amenities can grant public sector workers a form of monopoly power that lets them extract more rents,” the authors write.”People can only consume the beaches and sunshine of southern California, or benefit from dense urban areas like Manhattan, by living nearby, and public sector workers can therefore extract rents up to the point where those who pay the rents are induced to leave the area.

“The authors measure several variables, including types of weather (mild is most preferred), proximity to water, and population density (because of the variety of experiences and opportunities that heavily populated areas provide). Perhaps not surprisingly, their study finds that states with the highest differential between public and private sector wages, including California, New Jersey, New York, and Rhode Island all boast certain key amenities that help boost the public sector wage premium.

This is what I had in mind in my admittedly sketchy post on UBS’s return to Manhattan, and I am very happy to see Brueckner and Neumark, who has done fascinating work on the economic impact of minimum wage laws, apply more analytical rigor to the subject.

Now that Brueckner and Neumark have now constructed a rough-and-ready index tracking amenities, it is worth revisiting recent research on tax-related migration, a theme we’ve touched upon in this space. 

I’m reminded of one of California conservative Tom McClintock’s favorite lines:

Today, according to the statistics people look at, even with California’s bountiful resources, the most equitable climate in the entire continent, and with every blessing that God could bestow upon a land, people are finding a better place to live and work and raise their families out in the desolation of the Arizona and Nevada deserts. No conceivable act of God could ever wreak such devastation upon our state. It takes a government to do that. And it has. 

It is worth clarifying that the problem is rent-extraction, not high taxes per se. If Californians were paying high taxes that were then used to deliver really excellent public services delivered at the lowest feasible cost, we’d be dealing with another situation entirely. 



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