Forced Annexation: Expanding City Monopoly Power
Sapona is a golf community near Lexington where residents have paid for all of the services that they need and want: water, sewer, trash, and sheriff. Unfortunately for them, they also represent a huge tax base that revenue-hungry politicians in Lexington want to annex.
North Carolina is one of only four states that allows politicians to cover excessive spending by forcibly annexing more tax base. Residents of the targeted area have no say in the matter. They are victims of taxation without representation, a policy that angered the American colonists in the 18th century.
Daren Bakst, John Locke Foundation Director of Legal and Regulatory Studies, has written about the injustice of this antiquated state policy here, here, and here.
But economic analysis should also be considered. Business firms that have a guaranteed clientele are called monopolies. More precisely, a monopoly is defined as "a firm that is the sole seller of a product without close substitutes" (Essentials of Economics, 2nd ed, N. Gregory Mankiw, p. 553). These firms have few incentives to satisfy customer desires or keep costs down.
Cities fit that definition quite well. They are legally protected monopolies that are the sole providers of services without close substitutes. The electoral process is supposed to provide the public with a mechanism to express their desires for government services, but as a city grows larger and larger, the electoral power of the average citizen is diluted. Special interests and the permanent city bureaucracy take over and dominate government decision-making.
Thus, the forced annexation law allows NC cities to become larger, less responsive, more costly, and more monopolistic. On the other hand, complex and overlapping urban areas such as the San Diego, Denver, and Minneapolis metropolitan areas benefit from multiple jurisdictions that provide a more competitive environment. In those areas, citizens benefit by having more choices and more political power.
Doubters need only look at the research of Indiana University professor Elinor Ostrom who was awarded the Nobel Prize in Economic Sciences in 2009. She and her colleagues have used empirical research to show that smaller political jurisdictions deliver services at lower costs and with higher citizen satisfaction.
Dr. Ostrom’s Nobel Prize lecture focused on her research dealing with the provision of services in large, complex metropolitan areas characterized by multiple and overlapping political jurisdictions. Her research shows that "[m]etropolitan areas with large numbers of autonomous direct service producers achieved higher levels of technical efficiency." In other words, complex metropolitan areas such as San Diego, Denver, etc. create competition by having numerous political jurisdictions, which in turn keeps costs down and citizen satisfaction up.
Ostrom also notes that jurisdictions that cannot compete in this environment find that "citizens who are dissatisfied with service provision can ‘vote with their feet’ and move to [nearby] jurisdictions that come closer to their preferred mix and costs of public services."
North Carolina’s forced annexation law prevents these benefits by allowing Lexington, Charlotte, Raleigh, and all other NC cities to expand their monopoly position leading to inefficient provision of services, dissatisfied citizens and powerful special-interest groups, now euphemistically called "stakeholders."
North Carolina’s legislators need to consider the most recent research in economics and political science, not the myths propagated by special-interest groups and outdated political theories.
Durham convention center loses $1.4 million
While we are on the subject of unresponsive, wasteful, monopolistic governments, a new agreement in Durham virtually guarantees that taxpayers will pay $750,000 to cover the losses at the Durham Convention Center. This article in The News & Observer proclaims the new agreement between the management firm and the city as a great victory. Durham will have to pay only $750,000 and not the over $1.4 million that they have been paying.
We have documented the problems with city convention centers in numerous reports, such as here, here, and here. Our warnings and predictions have come true in many cases — Raleigh, Charlotte, and Asheville in particular.
But let’s use a hypothetical situation to demonstrate the point about monopolist governments dominated by special interests and city bureaucrats. Let’s suppose you are a citizen in Anytown, NC, and the city fathers and mothers are recommending that the city build a $200 million convention center. As responsible public servants, they want to ask citizens if they think it is a good idea and whether they are willing to pay for it. Thus, they put this proposition on the ballot: "If approved, city taxpayers will pay $200 million for building the new convention center and $1 million per year forever after to cover the operational deficits."
Please indicate by raising your hand if you believe that this proposition would pass. To my knowledge, it has never been done by a city in North Carolina. Instead, city councils rely on city staff and highly paid consultants to tell them all the reasons why building a convention center is a good idea. First on the list is the fact that, in many cases, funds come from a bed and meals tax paid largely by out-of-town visitors. Why not spend other people’s money; after all, they cannot vote me out of office. Another case of "taxation without representation." A tactic that was very popular with King George III and is currently very popular with city councils all over North Carolina. Let’s overlook the fact that it is an unjust way of raising money in a system that purports to hold elected officials accountable for their spending.
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