Ending Forced Annexation in Texas: Economic Case Against Involuntary Annexation

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Ending Forced Annexation in Texas: Hon. Jess Fields & James Quintero, TPPF, Center for Local Governance (July, 2015)


The Economic Case Against Involuntary Annexation

Annexation is most often couched not as a question of philosophy, or whether local governments have some inherent right to annex that supersedes other considerations, but as a question of economics. Sometimes this takes the simple form of adding more tax revenue. In some cities, there is a more complex planning question of managing growth via the regulatory controls available to a city, as opposed to having development occur in an unregulated way just outside the municipal boundaries.

Putting aside the different, but related questions of how much cities should tax and spend or how much they should regulate, it is easily acknowledged that both uses make sense, whether or not they are justifiable unto themselves. It is also obvious that annexation affords a solution to both—absorb more property into the city to pay more taxes, and grab more property to manage how growth occurs.

Yet, it is not enough to merely assume that municipalities know precisely what kinds of policies to pursue independent of market forces and outside variables. It cannot be taken for granted that cities, acting on their own to determine the number of residents they should have and the amount of property that should be within their city limits, know precisely what kinds of services to provide or at what level.

What this means is that a city, acting to annex a property, determines that it knows precisely the right level of service provision for its citizens inclusive of that property. When property owners do not consent to the annexation, however, the potentiality for market forces to interact with the public choice of how to allocate public goods is eliminated. The city is acting in a vacuum, and quite possibly inefficiently, in how it allocates public resources. Far better is the model proposed by Charles M. Tiebout in his influential 1956 article “A Pure Theory of Local Expenditures.” Tiebout proposed that local governments necessarily respond to the preferences of the population in how they allocate government resources, as long as people are free to move from place to place and choose their jurisdiction. He wrote: “If consumer-voters are fully mobile, the appropriate local governments, whose revenue-expenditure patterns are set, are adopted by the consumer-voters.”34

In other words, if the citizen (here, the “consumer-voter”) is able to move from place to place, then a market will be created whereby the governments reflect the preferences of their populations. A reduction of the concept would simply be that people vote with their feet.

On its face, this makes a great deal of sense. Who has not observed cities rise and fall in accordance with changing preferences of populations? In the 18th and 19th centuries, the urbanization that accompanied the Industrial Revolution was a result of individual wishes to move where jobs and opportunity were more plentiful, as opposed to rural areas where there was less.

In modern-day America, cities such as Buffalo and Detroit have undergone large-scale population declines due to, among other factors, the loss of traditional local industries and the development of suburbs and exurbs.

Detroit is worth a look, however, due to not only its clear loss of industrial prowess, but also for other factors presaging its population decline. While it is certainly true that America’s changing economy, as well as the development of suburbs, played large roles in the decline of Detroit’s population, it is hard to now pin the responsibility only on these factors. Indeed, in recent years, much of the population decline in Detroit has been squarely the cause of poor local policy, which has resulted in the largest municipal bankruptcy in American history. Those who can afford to flee Detroit have done so; those who cannot have stayed behind and suffered one of the most dangerous cities in the United States with poor schools, crumbling public services, and few opportunities for improving their station in life.

One cannot rule out that many have left Detroit simply because its government has failed the people.

Voting with one’s feet does not entail that for every small change in policy there will be a mass exodus; nor does it mean that every person is equally empowered through his economic situation to make the choice to move from place to place.

Instead, the general rule, Tiebout postulates, is that “… the consumer-voter moves to that community whose local government best satisfies his set of preferences.”35 This also lends an understanding to how the decisions of individuals in choosing where to live affect the level of public expenditures in a given community.

A practical implication of this is in tangible public goods such as parks. If three cities existed adjacent to one another, but only one provided a high level of public expenditure for parks, that community’s level of public expenditures could only be maintained if public commitment to that amenity continued. If individuals moving to the community did not care for the expenditures on parks, they would express that desire by voting for public officials committed to reducing expenditures on parks and shifting that spending elsewhere, or cutting them altogether.

However, if in such a community, people moved in and continued their commitment to public expenditure on parks, not only would the city continue its expenditures, but the other two adjacent communities might also be incentivized to raise their spending on parks as well. However, the ultimate choice rests with the voters of the communities themselves: the public services that are provided at a given time are ultimately held to account by the existing voters of that community.

Prospective residents do not have the luxury of handpicking from a basket of services, so they choose communities that suit their needs and desires. This concept is not only supported by Tiebout’s theory—it derives from basic economic elements present in both the neoliberal and the Austrian schools. Austrian economists would speak of such ordering of priorities as a natural condition of the human experience, that people prioritize their wants and needs within themselves by the very process of making a decision. In choosing a community to live in, these ordinate preferences are expressed by what takes precedence—be it better schools, nicer parks, better roads, or the lowest tax rate.

Non-Austrians would apply public choice theory to this process of choosing a community, due to the nature of the incentives involved. A neoliberal economist might say that individuals making such a choice are motivated by preferences and factors that ultimately lead them to maximize their utility in one community or another.

Whichever method one chooses to apply, it is clear that, all other things being equal, individuals choose communities that best suit their preferences, and that the “market” for municipal services, if one can call it that, ebbs and flows around the shifting and varying preferences of different individuals. That these people have a right to choose where to live is implicit in their ability to express a preference in the first place.

But if the person who chooses to live at the outskirts of a city but not in it, or in an unincorporated subdivision, is annexed, what then? The choices he has made with regard to his property and what kinds of services he requires are no longer respected; in point of fact, they are disregarded entirely.

Just as when government intervenes in the market for private goods and services, involuntary annexation produces unintended consequences by interfering with the expected or normal outcome of a transaction; in this case, between a person and the jurisdiction he chooses to live in. Property owners in an unincorporated county in Texas have chosen to live just so, and unless they seek annexation by their own action, are thus satisfied with their choice to live in this manner. If it were not so, they would not have made that choice. Whether or not the choice of living without certain services seems “rational” to the public planner, no value judgment can be made about the choice made by people whose preferences differ from that of the perceived ideal. Therefore, a municipality that seeks to create a different outcome—that is, to eschew the preference of those who live in unincorporated areas—will quite possibly end up creating a situation where, at best, the property owner is dissatisfied with the municipality doing the annexation. At worst, the property owner will change his behavior in response to the annexation.

The first scenario is political, but it has real effects. If many people are forcefully annexed into a municipality and are unhappy with their new jurisdictional status, they will respond in ways that change the dynamic of the existing community as well as that within which they already live. They may decide to revolt against the status quo in the city that annexed them, changing the order of things for those existing residents who might have been content with the policies of the city.

The second scenario is economic, and produces the greatest damage. If property owners who are annexed involuntarily change their behavior in response to the annexation, grave harm has been done to the market for property and the natural order of growth and development.

Suppose a person who lives on the outskirts of a charter city of 5,000 where one storage complex operates, is planning to build one in order to compete with the existing business. Building the competing business would add more storage units to the market, possibly benefiting more consumers, and might drive the price of units down through market competition. At the very least, the competitor might have a more difficult time maintaining monopolistic prices with a nearby competitor.

However, upon being annexed, that property owner might lose his right to build a storage complex—a business that might be deemed unsightly within the newly-annexed area’s plan. In such a scenario, he may have to dispose of his property at a lower value than otherwise, and in turn, the market will lose the additional units and price competition it would have gained from the original, intended use. These unintended consequences crop up wherever annexation is done, but it is that which is not seen—the uses that are barred because of new regulations, and the increased cost of development, which prevent development or value from being what it otherwise would be—that creates the greatest negative impact.

Involuntary annexation creates a cascade of negative consequences that endanger the ability of the marketplace to respond to citizen preference for goods and services, and prevents economic growth from occurring as it ought to by interfering with the market.