Byron Lutz
Section
Chief, Fiscal Analysis
Division of Research and Statistics
Board of Governors of the Federal Reserve System
20th St. and Constitution Ave., NW
Washington, DC 20551
Email: byron.f.lutz_at_frb_._gov
Tel: (202) 452-2983
Fax: (202) 736-1937
Published
Research
·
From
Today's City to Tomorrow's City: An Empirical Investigation of Urban Land
Assembly, American
Economic Journal: Economic Policy, 2016 (joint with Leah Brooks)
Because urban areas are
fundamentally constrained by the boundaries of land ownership, economic and
technological shocks cannot modify the urban landscape without also changing
the delineation of land. In this paper, we ask if urban land markets are
capable of producing such changes in land delineation. Specifically, we test if
there is enough land assembly – the legal joining together of two or more
parcels of land -- to put land to its highest value use. Failure to assemble
land may reduce agglomerative benefits, produce urban blight, push growth to
the city edge and away from the core; ultimately it may cause cities to forfeit
economic growth. We develop a simple theoretical framework which provides a
testable hypothesis: in the absence of market frictions, the price of land sold
for assembly should not exceed the price of land sold for other uses. This hypothesis
does not hold when frictions, such as holdouts and land use regulation, drive
the market for land assembly. We test this hypothesis using a novel dataset
that follows each of the 2.3 million parcels in Los Angeles County over a
twelve year period and allows us to observe all instances of assembly. We
address the potentially significant problem of selection into assembly by
comparing, within very small neighborhoods, the price of land for parcels sold
into assembly to price of land for parcels sold where the structure is
immediately torn down. This method and extensions find that to-be-assembled
land trades at a 15 to 40 percent premium. Thus, we find that urban land
markets are subject to significant frictions that prevent assemblies and
produce sclerotic urban redevelopment. Additional empirical results suggest
that private market frictions, such as holdouts, play an important role in
blocking assembly.
·
“The Role of Taxes in Mitigating Income
Inequality Across the U.S. States”, National Tax Journal, 2015 (joint with
Daniel Cooper and Michael Palumbo)
Income
inequality has risen dramatically in the United States since at least 1980.
This paper examines the role that tax policies play in mitigating income
inequality. The analysis primarily focuses on state taxes, but also explores
federal taxes. Two empirical approaches are employed. First, cross-sectional
estimates compare before-tax and after-tax inequality across the 50 states and
the District of Columbia. Second, inequality estimates across time are
calculated to assess the evolution of the effects of tax policies. The results
from the first approach indicate that the tax code reduces income inequality
substantially in all states. All of this compression of the income distribution
is attributable to federal taxes as state taxes, on average, widen the
after-tax income distribution slightly. Nevertheless, there is substantial
cross-state variation with some states’ tax codes meaningfully reducing income
inequality and others significantly increasing inequality. We also document
that state EITC programs can significantly mitigate income inequality, that
sales tax exemptions for food and clothing moderately reduce income inequality,
and that state-levied gasoline taxes work to increase inequality. The results
of the second empirical approach indicate that the mitigating influence of
taxes on income inequality has increased since the early 1980s, with two-thirds
of the increase due to the federal tax code and the remaining one-third due to
state taxes. The increase at the state level is due mostly to changes to the
tax code. In contrast, at the federal level the majority of the increase is due
to the widening of the pre-tax wage distribution interacting with the
progressive structure of the tax code.
Online
appendix here.
Older
version here.
·
Quasi-Experimental
Evidence on the Connection Between Property Taxes and
Residential Capital Investment,” American Economic Journal: Economic Policy,
2015.
Do low property
taxes attract residential capital investment? This question is answered using
an unusual school finance reform in the state of New Hampshire. The reform
induced large shifts in property tax burdens and this shock is used to identify
the empirical relationship between property taxes and new home construction.
The estimates suggest that, in most of the state, communities with a reduced
tax burden experience a substantial increase in residential construction. In
the area of the state near the region’s primary urban center (Boston), however,
the shock clears through a price adjustment .i.e. by capitalizing into property
values. The differing responses are attributed to differing housing supply
elasticities. Moreover, communities which experience a decrease in property tax
burdens, and witness a surge in building activity as a result, increase the
stringency of their land use regulation – a response likely to slow the growth
in housing supply.
·
“The Fiscal Stress
Arising from State and Local Retiree Health Obligations,” Journal of Health Economics, 2014 (joint
with Louise Sheiner)
A major factor weighing
down the long-term finances of state and local governments is the obligation to
fund retiree benefits. While state and
local government pension obligations have been analyzed in great detail, much
less attention has been paid to the costs of the other major retiree benefit
provided by these governments: retiree health insurance. The first portion of the paper uses the
information contained in the annual actuarial reports for public retiree health
plans to reverse engineer the cash flows underlying the liabilities given in
the report. Obtaining the cash flows
allows us to construct liability estimates which are consistent across
governments in terms of the discount rate, actuarial method and assumptions
concerning medical cost inflation and mortality. We find that the total
unfunded accrued liability of state and local governments for the provision of
retiree health care exceeds $1 trillion, or about ⅓ of total state and
local government revenue. Relative to
pension obligations discounted at the same rate, we find that unfunded retiree
health care liabilities are ½ the size of unfunded pension obligations. We also
find that using assumptions concerning the growth in health care costs that are
arguably more realistic than those employed by most states actually reduces the
size of the liability in most cases.
Pushing in the opposite direction, we find that using plausibly more
realistic mortality assumptions increases the size of liability. The second portion of the paper places
retiree health care obligations into context by examining the budget pressures
associated with retiree health on a continuing, largely pay-as-you go basis. We find that much of the projected increase
in retiree health obligations as a share of revenue is the result of health
care cost growth. On average, states
could put their retiree health obligations into long-run fiscal balance by
contributing an additional ¾ percent of total revenue toward the benefit each
year. There is, however, wide variation
across the states, with the majority of states requiring little in the way of
additional financing, but some states requiring a significantly larger
increase.
·
“School Desegregation,
School Choice and Changes in Residential Location Patterns by Race,” American Economic
Review, December 2011 (with
Nathaniel Baum-Snow)
This paper
examines the residential location and school choice responses to the
desegregation of large urban public school districts. We decompose the well documented decline in
white public enrollment following desegregation into migration to suburban
districts and increased private school enrollment and find that migration was
the more prevalent response.
Desegregation caused black public enrollment to increase significantly
outside of the South, mostly by slowing decentralization of black households to
the suburbs, and large black private school enrollment declines in southern
districts. Central district school
desegregation generated only a small portion of overall urban population
decentralization between 1960 and 1990.
·
“The End of Court-Ordered
Desegregation,” American Economic
Journal: Economic Policy, May 2011
In
the early 1990s, nearly forty years after Brown v. the Board of Education,
three Supreme Court decisions dramatically altered the legal environment for
court-ordered desegregation. Lower courts have released numerous school districts
from their desegregation plans as a result. Over the same period racial
segregation increased in public schools across the country -- a phenomenon
which has been termed resegregation. Using a unique
dataset, this paper finds that dismissal of a court-ordered desegregation plan
results in a gradual, moderate increase in racial segregation and an increase
in black dropout rates and black private school attendance. The increased
dropout rates and private school attendance are experienced only by districts
located outside of the South Census region. There is no evidence of an effect
on white student along any dimension.
·
“The Housing Crisis and State and Local
Government Tax Revenue: Five Channels,” Regional
Science and Urban Economics, July 2011
(with Raven Molloy and Hui Shan)
State and local government tax revenues
dropped steeply following the most severe housing market contraction since the
Great Depression. We identify five main channels through which the housing
market affects state and local tax revenues: property tax revenues, transfer
tax revenues, sales tax revenues (including a direct effect through
construction materials and an indirect effect through the link between housing
wealth and consumption), and personal income tax revenues. We find that
property tax revenues do not tend to decrease following house price declines.
We conclude that the resilience of property tax receipts is due to significant
lags between market values and assessed values of housing and the tendency of
policy makers to offset declines in the tax base with higher tax rates. The
other four channels have had a relatively modest effect on state tax revenues.
We calculate that these channels jointly reduced tax revenues by $15 billion
from 2005 to 2009, which is about 2 percent of total state own-source revenues
in 2005. We conclude that the recent contraction in state and local tax
revenues has been driven primarily by the general economic recession, rather
than the housing market per-se.
·
“Taxation
with Representation: Intergovernmental Grants in a Plebiscite Democracy,” Review of Economics and Statistics, 92(2),
May 2010
Economic theory predicts that
unconditional intergovernmental grant income and private income are perfectly
fungible. Despite this prediction, the literature on fiscal federalism
documents that grant and private income are empirically non-equivalent. A large
scale school finance reform in New Hampshire — the typical school district
experienced a 200 percent increase in grant income — provides an unusually
compelling test of the equivalence prediction. Most theoretical explanations
for non-equivalence focus on mechanisms which produce public good provision
levels which differ from the decisive voter’s preferences. New Hampshire
determines local public goods provision via a form of direct democracy — a
setting which rules out these explanations. In contrast to the general support
in the literature for non-equivalence, the empirical estimates in this paper
suggest that approximately 92 cents per grant dollar are spent on tax
reduction. These results not only document that equivalence holds in a setting
with a strong presumption that public good provision decisions reflect the
preferences of voters, but also directly confirm the prediction of the seminal
work of Bradford and Oates (1971) that lump-sum grant income is equivalent to a
tax reduction. In addition, the paper presents theoretical arguments that grant
income capitalization and heterogeneity in the marginal propensity to spend on
public goods may generate spurious rejections of the equivalence prediction.
The heterogeneity argument is confirmed empirically. Specifically, the results
indicate that lower income communities spend more of the grant income on
education than wealthier communities, a finding interpreted as revealing that
the Engel curve for education is concave.
·
“The
Connection Between House Price Appreciation and Property Tax Revenue,” National Tax Journal, LXI, No. 3, Sept. 2008
This paper explores two aspects of the
connection between property tax revenues and house prices. First, I estimate
the elasticity of property tax revenues with respect to house prices. This
elasticity does not necessarily equal 1 as governments may adjust effective tax
rates to offset changes in property values. Second, I examine the timing of the
relationship. Institutional features of the property tax make it unlikely that
changes in house prices will immediately influence tax revenues. The results
suggest that the elasticity eventually equals 0.4 and that it takes three years
for house price changes to impact tax revenues.
·
“State
and Local Finance and the Macroeconomy: The
High-Employment Budget and Fiscal Impetus,” National Tax Journal, LXI, No. 3,
Sept. 2008 (with Glenn Follette and Andrea Kusko)
We examine the interplay of the economy
and state and local budgets by developing and examining two measures of fiscal
policy: the high-employment budget and fiscal impetus. We find that a 1
percentage point increase in cyclical GDP results in a 0.1 percentage point
increase in NIPA-based net saving through the automatic response of taxes and
expenditures. State and local budget policies are found to be modestly procyclical. Stimulus to aggregate demand is about 0.2
percentage point less following a business cycle peak than it is during the
period before the business cycle peak.
·
“The Impact of
Employer-Provided Health Insurance on Dynamic Employment Transitions,”
Journal of Human Resources, 37(1), Winter 2002: 129-162 (with Donna Gilleskie)
We estimate
the impact of employer-provided health insurance (EPHI) on the job mobility of
males over time using a dynamic empirical model that accounts for unobserved
heterogeneity. Previous studies of job-lock reach different conclusions about
possible distortions in tabor mobility stemming from an employment-based health
insurance system: a few authors find no evidence of job-lock, although most
find reductions in the mobility of insured workers of between 20 and 40
percent. We use data from the National Longitudinal Survey of Youth which
includes variables describing the health insurance an individual holds, as well
as whether he is offered insurance by his employer. This additional information
allows us to model the latent individual characteristics that are correlated
with the offer of EPHl, the acceptance of EPHI, and
employment transitions. Our results provide an estimate of job-lock unbiased
through correlation with positive job characteristics and individual specific
turnover propensity. We find no evidence of job-lock among married males, and
produce small estimates of job-lock among unmarried males of between 10 and 15
percent.
Working Papers
·
“The Effects of School
Desegregation on Crime,” NBER
Working Paper # 15380, Sept. 2009 (w/ Dave Weiner and Jens Ludwig)
One of the most striking features of crime in America is its disproportionate concentration in disadvantaged, racially segregated communities. In this paper we estimate the effects of court-ordered school desegregation on crime by exploiting plausibly random variation in the timing of when these orders go into effect across the set of large urban school districts ever subject to such orders. For black youth, we find that homicide victimization declines by around 25 percent when court orders are implemented and homicide arrests also decline significantly, which seem to be due at least in part to increased schooling attainment. We also find positive spillover effects to other groups, with beneficial changes in homicide involvement for black adults and perhaps whites as well. Our estimates imply that imposition of these court orders in the nation’s largest school districts lowered the homicide rate to black teens and young adults nationwide by around 13 percent, and might account for around one-quarter of the convergence in black-white homicide rates over the period from 1970 to 1980.
Research in Progress
·
“Vestiges of Transit:
Urban Persistence at a Micro Scale” revise and resubmit Review of
Economics and Statistics (with Leah Brooks)
In this
paper, we document spatial persistence at a micro scale and explore its causes.
The streetcar dominated urban transit in Los Angeles County from the 1890s to
the early 1910s, and was off the road entirely by 1963. However, we find that
its influence remains readily visible in the current pattern of urban
density. Further, we show that this
pattern has reinforced, not muted, over the nearly 60 year since the
streetcar's removal. Our evidence is most consistent with the defunct streetcar
influencing modern behavior by serving as a focal point, coordinating both land
use regulation and agglomerative clustering.
·
“Can Fiscal Rules Constrain the Size of Government?
An Analysis of the `Crown Jewel’ of Tax and Expenditure Limitations”,
revise and resubmit Journal of Public Economics (joint with Paul
Eliason)
Fiscal
rules attempt to alter budget outcomes by constraining policy makers. They have been one of the primary responses
to the recent spat of fiscal policy failures around
the globe---e.g. Greece, Puerto Rico and Detroit. It is unclear, though, whether these rules
cause a change in budget outcomes, are evaded by policy makers, or merely
ratify the existing preferences of a jurisdiction's voters and officials. We ask if fiscal rules are capable of
altering budget outcomes by examining what is arguably the most stringent set
of fiscal rules in the U.S.—Colorado's Taxpayer Bill of Rights (TABOR). TABOR applies to all sub-national levels of
government in Colorado, sets tight caps on essentially all forms of government
revenue and in theory has almost no escape clauses which would allow officials
to violate the caps. Previous
examinations of TABOR have universally come to the conclusion that it significantly
reduced both taxation and spending -- i.e. that it caused a reduction in the
size of government. To evaluate TABOR,
we explore several ways in which the synthetic control methodology of Abadie et al. (2010) can accommodate multiple outcome
variables (taxes and expenditures). We settle
upon a novel approach of estimating treatment effects for multiple outcomes
simultaneously. Our results suggest that
TABOR had no effect on the level of taxes or spending in Colorado and provide
no support for the contention that fiscal rules alter budget outcomes. Instead, TABOR appears to have been partly
evaded by policy makers and voters despite its stringency and partly nothing
more than a signal of the state's preference over the size of its public sector.
Conference
Volumes
·
“Fiscal
Rules, What Does the American Experience Tell Us?,” Rules and Institutions for Sound Fiscal Policy after
the Crisis, Banca d’Italia, 2012. (joint with Glenn Follette)
·
“Fiscal
Policy in the United States: Automatic Stabilizers, Discretionary Fiscal Policy
Actions, and the Economy,” Fiscal Policy: Lessons from the
Crisis, Banca d’Italia, 2011. (joint with Glenn Follette)