Poverty in U.S. Metropolitan Areas: What Are the Key Determinants and What Is the Role of Local Fiscal Structure?1

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ABSTRACT

This paper examines poverty in U.S. metropolitan statistical areas (MSAs). We first investigate the temporal dynamics of poverty rates by using the Markov Transition matrix and then use regression analysis to examine how MSA fiscal tax structure and spending - specifically local property taxes and sales taxes and spending on education - might affect poverty rates and their persistence in U.S. metropolitan areas. We find evidence of poverty persistence across MSAs in the United States. From 1995 to 2005 there was very little change among U.S. metro areas in poverty rank, with the highest poverty areas retaining their undesirable ranking over the business cycle. We identify that poverty can be reduced with sustained periods of economic growth, increased levels of educational attainment, and local and state fiscal policies that encourage human capital accumulation, economic investment and business activities.

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I. INTRODUCTION

In the United States a large proportion of low-income households are concentrated in central cities and surrounding counties of Metropolitan areas (MSAs) (Madden, 2003; Cushing and Zheng, 2000; Voss, Long, and Hammer, 2006; Partridge and Rickman, 2006). Although many poor areas (counties and MSAs) in the U.S. were able to reduce poverty rates during the mid-to-late 1990s period of economic expansion, the dynamics of poverty in U.S. MSAs is characterized by relative poverty persistence (Tebaldi and Gittell, 2007; Partridge and Rickman, 2005 and 2006).

Previous research identifies that poverty across MSAs is determined by a collection of local factors that interact with national social and economic conditions. Hoover, Enders and Freeman (2008) identify that cyclical changes in the economy strongly affect poverty, with poverty rates declining significantly during periods of strong growth in gross domestic product. Employment growth is also found to have an important role in reducing poverty rates. Partridge and Rickman (2006) identify relatively long (5-year) durations of employment growth as the most important factor in poverty reduction. Short-term (2-year) growth was identified as having significantly less impact on poverty rates.

Weinberg (2006) and DeFina and Thanawala (2001) find evidence that national and state fiscal policies can directly affect poverty rates, finding that lower taxes have contributed to reduced poverty in the United States during the 1990s. Reed (2008) identifies fiscal policies influence on economic growth, with lower taxes associated with higher growth. This suggests that fiscal policies can also indirectly, through their influence on growth, affect poverty incidence.

For U.S. counties and metropolitan areas it was the overall strong U.S. economy and employment growth in states and counties that were primarily responsible for poverty reduction across MSAs in the 1990s. Gittell and Tebaldi (2007) and Partridge and Rickman (2005 and 2006) also find that high educational attainment is strongly correlated with lower poverty and strong poverty reduction in the 1990s. High population concentration of racial and ethnic minorities (e.g. Hispanics) are also found to be positively related to high poverty rates in the U.S. (Hoover et al., 2008; Gittell and Tebaldi, 2007; Partridge and Rickman, 2005, among others).

A shortcoming of the literature on poverty at the county and MSA level in the U.S. is the limited analysis of local fiscal structure's impact both direct and indirect. In particular, little attention has been given to examine the role of the tax structure and spending on poverty rates and the persistence of poverty across U.S. metropolitan areas.

This paper considers whether or not U.S. metropolitan statistical areas (MSAs) are subject to poverty persistence that could develop due to relatively high tax burden on businesses and households. We examine if local area fiscal structure could operate as a barrier to employment and business growth and make it difficult to transform local areas from high to low, or even to average poverty. …