Can the ‘Sharing Economy’ Reduce Income Inequality?

Not that sharing economy though -- the other one.
July 2016
By Frank Shafroth  |  Columnist
Director of the Center for State and Local Government Leadership at George Mason University

So far, 2016 has been framed by unfolding fiscal tragedies in a number of cities -- Flint, Mich.; Ferguson, Mo.; and East Cleveland, Ohio, come to mind. Plagued by high poverty, rising crime rates and diminished sources of revenue, these cities are examples of the increase in income inequality among U.S. municipalities.

Just as the richest Americans have raced ahead of working-class Americans, there are haves and have-nots among cities, too. It got me thinking: What role should states play in all of this? And more specifically, are there ways to use the “sharing economy” to narrow the disparity gap?

For a change, we’re not talking about Airbnb or Uber. The sharing economy I mean is about regional governance, or sharing agreements where local policymakers create new, multijurisdictional fiscal arrangements to address regional objectives.

Right now, throughout America, otherwise identical households pay different taxes for the same level of public services simply because they live in different cities. Bo Zhao, senior economist at the Boston Federal Reserve, wonders if such differences in taxes put some cities or counties at a disadvantage in economic competition. After all, he says, fiscal disparities occur when economic resources and public service needs are unevenly distributed across localities.

For the most part, it’s been up to cities and counties to attempt to address these growing disparities. There are any number of longstanding examples of regional taxation and regional tax-base sharing across the U.S., such as in Minneapolis-St. Paul. More recently, there are new innovations on the theme: The Scientific and Cultural Facilities District, for example, distributes roughly a tenth from a 1 percent sales and use tax to cultural facilities throughout the Denver metropolitan area.

States are really in the best position to implement sharing agreements, but few do. One exception is Minnesota, which more than a generation ago enacted legislation to encourage a sharing economy statewide. The Minnesota Fiscal Disparities law has three important goals: reduce the impact of fiscal considerations on location of business; reduce interjurisdictional competition; and direct resources to communities facing the greatest fiscal pressures.

The law shifts millions of dollars in property taxes to be shared among communities in a metro area, including cities, counties and school districts. Each jurisdiction or entity “contributes” 40 percent of post-1971 growth in its commercial-industrial property tax base to an areawide pool, where the tax base is then allocated among local governments in inverse relation to their per capita fiscal capacity. The percentage of the total tax base in the Minneapolis-St. Paul areawide pool has increased from 6.7 percent in 1975 to 37.6 percent by 2012. More than $588 million of taxes were shared among the participating localities in 2012. The distribution of shared revenue reduced incentives for cities to compete for businesses and infrastructure projects, and it created greater incentives for shared investments, especially in infrastructure.

It is an effective fiscal disparities program. But unfortunately, despite the growing income disparity among localities and regions, the approach does not seem to be catching fire with other states or with the biggest potential player of all, the federal government.