Working Paper #484
Financing Cities
Robert P. Inman
Development Macroeconomics Microeconomics Urban
The macro-economic and micro-economic evidence makes a persuasive case for cities as important centers for productive efficiency, innovation, and economic growth. For cities to achieve their full economic potential, however, complementary public services are required. This paper reviews the arguments and evidence for the efficient financing and governance of city public services. While infrastructure construction and maintenance, K-12 education, and provision of clean and safe environments for workers are legitimate fiscal responsibilities in the efficient city, city funding for redistributive services to low income households is not. Financing should assign residential taxes to residential services and business land taxes and fees to business services. The efficient city’s governance should foster competition and choice through neighborhood financing and provision of congestible city services (education, basic policing and fire protection, trash collection) and an institutionally strong city mayor chosen by competitive city-wide elections for the financing and provision of less congested city-wide services (infrastructure, courts and prisons, public health).