Why Tax Base Fragmentation Is a Serious Problem

Added: 2026-05-14

[00:00:00]As someone who grew up and went to school in the inner city, it always bothered me to hear about rich suburbs that had better funded schools, better maintained park systems, more modern infrastructure. I rarely had reason to go to these places, but when I did, the contrast was pretty jarring. And as I grew into adulthood, it just made me more resentful. Why is it that there are so many central cities and suburbs that struggle to provide the basics alongside wealthy suburban on claves that provide top-tier everything just as a matter of course. Well, recently I got skee did at on Blue Sky topic suggestion from Robert Manduca, top 10 most egregious municipal tax havens in the US. And honestly, I've had an idea like this on my list for a while, including a couple of research papers to dig into. And coincidentally, the lead author on one of the papers is also named Robert Manduca. Okay, it's the same guy. But I'm not going to do this top 10 style because the paper itself and the findings are really so much more interesting. First, why is this so important? Well, in the US, there are a lot of services that are administered at the federal and state level, but things like K-12 education, law enforcement, public housing, parks, sanitation usually provided by individual cities. And they're kind of on their own. The paper, which I'll introduce in a minute, points out that most federal systems in other wealthy nations feature lots of interjurisdictional redistribution to smooth out the disparity in resources between different localities. But in the US, local governments have to generate a much larger portion of their revenue from taxes and fees that are levied from within their own boundaries. So take how this plays out in terms of school districts. You'll often hear that suburbs have {quote} and {quote} better schools, well, debatable. But, inasmuch as it's true, it's not really because people in the suburbs are more upstanding or hardworking or smarter.

[00:02:07]It's because the jurisdiction is comprised of people who saw fit to take their wealth and move to an affluent enclave with a high per capita tax base and consequently better funded schools.

[00:02:20]Note that I have not yet made a video about the urbanism of public school systems, but just be warned, I have takes. Like, I might argue that if you're in a district that's well funded, but also insulated from socioeconomic diversity, you might end up with marginally better test scores, but a much, much worse developmental experience. Hey, all of my opinions are not going to be popular, but I can live with that. Anyway, here's the paper I want to talk about. It's tax base fragmentation as a dimension of metropolitan inequality by Manduca, Highsmith, and Wagner, published this year in the journal Socioeconomic Review, link down in the description as well. The paper lays out the case for why all this matters. The ability of local governments to provide critical services is determined by a taxable wealth that's contained within contested municipal boundaries, and the jurisdictional splintering and economic segregation that are so pervasive in US metro areas, and the lack of interjurisdictional reallocation I mentioned earlier, combined to create a situation that the authors call tax base fragmentation, which is upstream of all kinds of inequities in our urban areas.

[00:03:37]So, there are all kinds of further avenues for study on something like this, but I really like the focus here.

[00:03:43]It's taxable property wealth, which means what we're looking at is the jurisdictional distribution of fiscal resources. So, while it's related to other concepts like spatial segregation, which can manifest in neighborhoods within the same jurisdiction and to overall tax base, and jurisdictional fragmentation, which is a broader concept that also encompasses questions of governance and spending priorities, tax base fragmentation is its own distinct and specific thing. The legal geographic segregation of a tax base away from those of neighboring communities. So, here's what they did.

[00:04:22]They wanted to come up with a measure for tax base relative to the population for every jurisdiction in the US, and since the overwhelming majority of local revenue comes from property taxes, what they did was assemble a database of appraised values for all parcels in the US and assign each parcel to the smallest general purpose local government containing it that has the independent power to raise property taxes. Generally, the municipality or town for incorporated places and the county for unincorporated places. Then, to do the fragmentation analysis, they created a couple of metrics, and as I explain these, I'm going to be sharing the web tool they created to go with the paper, and I'll link it down the description. The first metric is the fiscal capacity ratio or FCR, which measures the per capita taxable resources available to each jurisdiction relative to the metro area-wide number.

[00:05:20]So, for example, the taxable value per capita of $387,279 for Winnetka, Illinois, is 3.83 times that of the Chicago metro area as a whole. The other metric is a metro area-wide measure, the tax base fragmentation quotient or TFQ, which measures the share of each metropolitan area's total property tax base that would need to shift across the local jurisdictional borders, say suburban city limits, in order for all municipalities within the metropolitan area to have the same tax base per capita. We can illustrate all of this with Detroit. The Detroit metro area is the number one most tax base fragmented metro area over a million with a TFQ of 0.235, meaning 23.5% of the metro area's total taxable property would have to shift across jurisdictional lines in order to equalize the overall tax base per capita. You can see this just in the fact that the core city itself has a tax base of just over $25,000 per capita compared to a metro area wide number of around $82,000.

[00:06:33]So, Detroit has just 31% the fiscal capacity that the overall region does, and you can see that several of the distant suburbs have a fiscal capacity multiple times that of the region. I didn't really want to get into a whole thing about white flight in this video because I think it over simplifies the dynamic, but there's no doubt it's a big consideration. So, I'll just quote from the paper. Both historically and in the present, racial antagonism has been essential driver of local government fragmentation as white residents depart diverse cities and use incorporation and zoning logic create new municipalities that will not have to share space, funding, or services with poorer residents of color. Multiple citations.

[00:07:21]And just to bookend this metric, here's the major metro area with the least tax base fragmentation, none in fact, Honolulu with a TFQ of exactly zero. And this is because there's only one local jurisdiction, the County of Honolulu, aka the island of Oahu. One consolidated city-county government providing all services for the whole island. Now, this isn't saying wealth and poverty aren't concentrated in particular geographic places on the island. Of course, they are, but the key thing is they all share one tax base and they all participate in its benefits. Anyway, exploring the data with the map tool is eye-opening and kind of fun. So, go explore your own metro area and see how things play out.

[00:08:11]By the way, Lexington, Kentucky, also one of the lowest tax base fragmentation quotients in the US. So, if you want to hear more about the benefits of a consolidated city county government and a strong urban services boundary, I've got a recent video on that. Probably an even more interesting use of the map is to go looking for the cities with the highest and the lowest fiscal capacity ratios. The authors of the paper use a cut point of 0.33 or below 1/3 of the metro area wide average to identify what they call fiscally impoverished jurisdictions. These are usually not the central city, but Detroit is a huge exception and the largest jurisdiction in this category. The paper mentions interesting examples including Brooklyn, Illinois, quoting from the paper, an eight square block village of 607 residents, 94% of whom are black, located just across the Mississippi River from St. Louis. The town was settled in the 1820s by 11 families who fled enslavement in Missouri. It is believed to be the oldest town founded by black Americans. Anyway, cities with the lowest FCRs are listed in the paper and you can browse the map itself. I'd encourage you to consider the moral dimension of coordinating people into jurisdictions where economic struggle and underfunded public services create a vicious cycle of self-fulfilling prophecy and just doesn't seem ideal.

[00:09:41]Okay, in a second, we're going to look at a different group of outliers, the cities with the highest fiscal capacity ratios, and see if you can guess what some of those cities are. Connect on the apps to keep up with my whereabouts. I do have travel coming up pretty much every month through the end of the year, so follow to get sneak peeks of upcoming city visit content. More in-person events are happening, Austin for sure in early September, and I will probably do a 1-week pre-sale for patrons for this one. Stay tuned. Before we get to this last bit, I want to make one more case for why all this stuff actually matters.

[00:10:18]I found this passage from the paper super compelling. We find that resource-poor municipalities source a greater percentage of their budgets from intergovernmental transfers, user charges, fines, and forfeitures as compared to other municipalities in the same state and metropolitan area. In other words, cities with low fiscal capacity make up the difference by tapping revenue sources that are much more regressive and extractive. So, the concern is not just the low tax base itself, it's the vicious cycle that it sets into motion.

[00:10:54]Okay, so the other end of the spectrum is cities with an extraordinarily high level of taxable property wealth per capita. The authors designate cities with a fiscal capacity ratio of 3.0 or higher, meaning at least three times the tax base per capita of the surrounding metro area, as what they call municipal tax havens. Now, these can be places like Lake Buena Vista, Florida, which has a huge amount of taxable property but very few residents, but more often we're talking about wealthy enclaves where the residents can benefit from high levels of infrastructure and services while walling themselves off from the parts of society they'd prefer not to cooperate or probably interact with. There are some super interesting small communities that are among the very highest in terms of FCR. I'll leave you to explore those on your own, but since it would be out of character for this channel to not include some sort of ranked list, I'm going to give you the 10 highest population cities with an FCR over 3.0, starting with number 10, East Hampton, New York. believable. Paramus, New Jersey, a little surprising, but just barely over three. Beverly Hills, California, passes the smell test.

[00:12:09]Manhattan Beach, California, at number seven. La Quinta in California's Coachella Valley, coming strong with the country club property values. Five, Coral Gables, Florida, which I ground-truthed in my Miami video and doesn't surprise me to see on this list.

[00:12:25]Southampton, New York, one of many Hamptons over the 3.0 threshold.

[00:12:30]Greenwich, Connecticut, technically part of the Bridgeport-Stamford metro area.

[00:12:35]Miami Beach, also ground-truthed and a slam dunk to make this list. And the highest population city with a fiscal capacity ratio over 3.0, Newport Beach, California, population close to 100,000 and an FCR over four. Southern California, never change.

[00:12:55]So, a thing I heard from time to time in planning school and then later in the profession itself is also mentioned in the paper. The fact that metro areas are sliced into different jurisdictions that have different socioeconomic characteristics and different tax regimes and that provide differing levels of public service is actually a virtue. It gives people the freedom to, quote and quote, vote with their feet to select their preferred bundle of taxes and services. I heard this phrase, vote with their feet, more times than I can count, but I think what I've finally come around to believing is that what people are really doing is voting with their dollars, which I don't think of as a virtue, but probably is consistent with the times we live in.

[00:13:40]And that's all I've got. Thanks for joining today, and thanks as always to the patrons for your direct support, especially appreciated in these uncertain economic times where the other potential revenue sources for this particular profession get kind of dicey.

[00:13:55]Your Nebula subscriptions help to keep the great topic suggestions coming, even those of you who are not University of Michigan profs. I'll be back with a new topic next week, and I'll see you then.