How City Borders Create Extreme Wealth Gaps Between Neighbors in American Metro Areas

A new large-scale study from the University of Michigan shines a bright light on a problem most people rarely think about: how city and town boundaries themselves play a major role in driving inequality within U.S. metropolitan areas. While conversations about inequality often focus on income or race, this research shows that local government borders and property tax systems quietly shape who gets well-funded schools, safe streets, and quality public services—and who does not.

At the heart of the issue is something the researchers call tax base fragmentation. In simple terms, this means that taxable property wealth—homes, offices, factories, shopping centers—is unevenly divided across the many municipalities that make up a metro area. Because local governments in the U.S. rely heavily on property taxes to fund daily services, where that wealth is located matters enormously.

The study, published in Socio-Economic Review, was led by sociologist Robert Manduca, along with Brian Highsmith of UCLA and Jacob Waggoner of Harvard. Using an extraordinary dataset of 138 million property tax records nationwide, the team mapped how property wealth is distributed across cities, towns, and villages in metropolitan regions throughout the country.

Why Local Borders Matter More Than You Think

In the United States, local governments are responsible for many essential services: public schools, police and fire departments, parks, road maintenance, and sanitation. Unlike many other wealthy countries, the U.S. places much of this responsibility at the local level while offering limited centralized redistribution to smooth out disparities.

This structure creates a major problem when wealthy areas are allowed to form their own municipalities. State laws in many parts of the country make it relatively easy for affluent communities to draw their own borders, keeping valuable property wealth inside a small jurisdiction rather than sharing it across the broader metro area.

As a result, two cities sitting right next to each other can have wildly different financial capacities, even though they are part of the same regional economy. One community may enjoy pristine parks, well-funded schools, and low tax rates, while its neighbor struggles just to keep basic services running.

Measuring the Wealth Divide With New Tools

To better understand the scale of this problem, the researchers introduced two new metrics that capture how fragmented local tax bases really are.

The first is the Tax Base Fragmentation Quotient (TFQ). This measure looks at an entire metropolitan area and asks a simple but powerful question: How much property wealth would need to be redistributed across municipal borders so that every city and town has the same tax base per person? In some large metro areas, the answer is staggering—more than 20% of all property wealth would need to move to achieve equal footing.

The second metric is the Fiscal Capacity Ratio (FCR). This works at the local level, comparing a single municipality’s per-capita property wealth to the metro-area average. An FCR far above 1 indicates a community with exceptional financial advantages, while an FCR far below 1 highlights places that are structurally disadvantaged by how boundaries are drawn.

Together, these tools reveal patterns that income statistics alone often miss.

Municipal Tax Havens and Fiscally Impoverished Cities

One of the most striking findings of the study is the emergence of what the researchers describe as municipal tax havens. These are cities or towns where per-capita property wealth is at least three times higher than the metro average.

Some of these places are well known, such as Malibu, Miami Beach, and Greenwich. Others are far less familiar but just as important. For example, Bay Lake, Florida, home to Disney World, has very few residents but an enormous commercial tax base. Vernon, California, an industrial enclave near Los Angeles, is another example. These jurisdictions function like local tax shelters, benefiting from the surrounding metro economy while keeping most of the taxable wealth within their tiny borders.

On the opposite end are fiscally impoverished jurisdictions—municipalities with less than one-third of the metro area’s average per-capita property wealth. This group includes major cities like Detroit, Newark, and Bridgeport, as well as small towns such as Brooklyn, Illinois.

What’s important here is that these places are not struggling simply because residents earn less. Instead, their municipal boundaries exclude them from the wealth of their surrounding region, leaving local governments with limited resources to serve large populations.

Detroit and Honolulu: A Tale of Two Systems

The study highlights stark contrasts between different metro areas. Detroit stands out as one of the most fragmented regions in the country. The city of Detroit has a tax base per resident that is less than one-third of the metro average, while nearby small suburbs such as Lake Angelus boast per-capita tax bases more than 20 times higher.

In contrast, Honolulu, Hawaii, offers a revealing counterexample. Hawaii has no municipalities smaller than the county level, meaning everyone shares the same tax base regardless of neighborhood wealth. Even though economic inequality exists, the absence of jurisdictional fragmentation prevents the extreme fiscal divides seen in many mainland metros.

The Real-World Impact on Public Services

One might assume that cities with smaller tax bases simply raise tax rates or rely on state and federal aid to make up the difference. The study shows this is not what typically happens.

Instead, fiscally strained municipalities often turn to regressive revenue sources such as fines, fees, and utility charges. These methods place a heavier burden on residents who are already economically vulnerable, deepening inequality rather than alleviating it.

Meanwhile, wealthier municipalities can offer better services without higher taxes, reinforcing their appeal and further entrenching regional disparities.

Why This Is a Hidden Driver of Inequality

Perhaps the most important takeaway from the research is that tax base fragmentation operates quietly in the background. People tend to think inequality is about individual success or failure, but this study shows how policy decisions about local governance structures play a decisive role.

These inequalities are not inevitable. They are the result of choices about municipal incorporation, revenue sharing, and fiscal responsibility. The authors argue that reforms such as regional revenue sharing, changes to municipal boundaries, or stronger state and federal transfers could significantly reduce disparities between neighboring communities.

To help make these patterns visible, the research team also created an interactive online visualization that maps the fiscal capacity of every municipality in the United States. This tool allows anyone to explore how tax base fragmentation affects their own metro area.

Understanding the Bigger Picture

Tax base fragmentation adds an important new dimension to conversations about inequality. It explains why two places that look similar on the surface can have vastly different public resources, and why struggling cities often face challenges that go far beyond local leadership or budgeting decisions.

By focusing on how wealth is locked behind municipal borders, this study encourages a broader discussion about fairness, shared responsibility, and the future of metropolitan regions in the United States.

Research paper:
Manduca, R., Highsmith, B., & Waggoner, J. (2025). Tax base fragmentation as a dimension of metropolitan inequality. Socio-Economic Review. https://doi.org/10.1093/ser/mwaf055