How Municipal Property Tax Responded to State Aid Cuts: The Case of Massachusetts Municipalities in the Post‐2001 Fiscal Crisis

This empirical study examines municipal property tax responses to state aid cuts during the post‐2001 fiscal crisis. Using panel econometric techniques on annual changes in property tax levy by 351 incorporated Massachusetts municipalities in the period of 2002–2006, the results suggest that municipal governments offset about 9 cents of each dollar of net state aid cut through the increase of their property tax rates. It contributes to public finance literature on the extent to which local property tax can be used to stabilize municipal revenues when the intergovernmental revenue shrinks.     

The incentive effects of property taxes on local governments

This paper applies the ideas of Brennan and Buchanan (1977, 1978, 1980) to local property taxes. When local governments maximize their revenues, property taxes provide incentives for adequate amenity provision. Local amenity provision determines property values which then determine local tax revenues. As long as the demand for housing is inelastic, property-taxes will provide stronger incentives for local governments than lump-sum taxes. As current property values reflect expectations about future amenity levels, property taxes create incentives for even the most myopic government to invest for the future. Local property taxes can also act to limit the incentives of localities to tax; there are cases where higher levels of local property taxes lead to lower overall tax burdens. These ideas are applied to the tax reform in the late 1970s; one reason that tax reform may have been so successful is that in a period where land prices are driven by many forces other than government amenities, property taxes lose their value as incentive devices.     

Tax and Expenditure Limitations and the Fiscal Response of Local Government: Asymmetric Intra-Local Fiscal Effects

This article empirically investigates the effects of introducing statewide measures to limit the ability of local jurisdictions to raise revenue or make expenditures. It does so in intervals of five years over a 25-year period, using fiscal observations for 31,804 units of local government in 787 metropolitan counties across the contiguous United States. Specifically explored is the effect of tax and expenditure limitations on the variation in revenues and expenditures between general purpose governments and school districts within county areas. Rather than imposing a uniform constraint across jurisdictions, tax and expenditure limitations (TELs) are associated with increased variation across both general purpose and school district revenues and expenditures and, by implication, increased service differentials. Effects are found to be asymmetric, with increased variation greatest within counties comprising the urban core and those with relatively more disadvantaged populations. The implications are that TELs are most constraining on the ability of governments serving economically less prosperous and at risk populations to meet public service needs. Such differential effects are of more than questionable merit and are the result of the application of blunt instruments to what is often an undemonstrated need. The outcome impairs both the efficiency and responsiveness of the local public sector.     

How Cities in California Have Responded to Fiscal Pressures Since Proposition 13

Fiscal pressures on California cities have been severe since the passage of Proposition 13. Federal and state aid policies have, in fact, exacerbated an already wrenching pattern of revenue losses since FY 77-78. State aid, in particular, has perversely dropped the most for those cities hit hardest by reductions in other revenues outside their direct control. Despite this, California cities have kept total real per capita revenues and expenditures constant over this period by increasing revenues from a variety of local sources—and especially from current service charges for enterprise activities. Furthermore, cities hit hardest by exogenous revenue losses have increased locally raised revenues the most. In short, cities in California have responded to reductions in revenues outside their direct control by increasing revenues from sources within their direct control, rather than by reducing expenditures and their revenue-increasing responses have tended to be in proportion to the losses they have faced in exogenous revenues.     

Revenue Diversification: Fiscal Illusion or Flexible Financial Management

This study examines the trends in revenue diversification in approximately 240 suburban municipalities in the Chicago metropolitan region between 1988 and 1997. It then tests a model of revenue diversification's impact on tax effort using data from 1993 to 1997, and separated by home rule and non–home rule municipalities. Trends show that suburbs with higher increases in diversification tend to be home rule, younger, less residential, experiencing more growth, less reliant on property taxes, and more reliant on sales taxes. Model estimates show that communities with more revenue diversification have lower tax effort when controlling for other determinants of tax effort, and this effect is stronger in non–home rule municipalities.     

Municipal Communications Tax Revenue Reliance and Fiscal Impact of Possible Federal Preemption

This paper presents empirical evidence of the extent to which municipal governments might be affected by federal preemption in the communications sector in light of the substantial variation in municipal governments' reliance on communications tax revenues. The results suggest that the federal preemption would have a negative fiscal impact on the majority of municipal governments, and the extent of the impact would vary substantially. The analysis also indicates that it would be challenging or legally impossible for some city governments to make up for the magnitude of revenue loss due to the states' constraints on municipal revenue‐raising capacity.     

Intrametropolitan financial flows under tax increment financing

Under tax increment financing (TIF), the property tax revenues of county, school and other local governments are used to finance the development expenditures of cities. This paper examines the tax shifting that results when TIF is used by numerous cities in a single urban area. Development subsidies for governments and individuals are distinguished and TIF is shown to have potential negative financial impacts on some taxpayers within a metropolitan area unless two important conditions are met. Data for cities in Milwaukee County, Milwaukee are used to demonstrate the potential tax shifting that results when TIF is used in a large urban area.     

Local Option Sales Taxes and Fiscal Disparity: The Case of Georgia Counties

While local option sales taxes (LOST) have become an important revenue source for local governments, there has been concern about the distribution of LOST revenues: the uneven distribution of sales tax bases may have introduced a new source of fiscal inequality and exacerbated existing fiscal disparity. Using Georgia county data (N=159, 1970–2000), this study examines whether and how LOST have affected local fiscal disparity. Our findings suggest that the effects of LOST on fiscal disparity vary with the approach to measure revenue‐raising capacity; thus the issue of LOST distribution is sensitive to the underlying conceptualization of “fiscal equity.”     

Turning Up the Heat: The Impact of Electric Utility Competition on K–12 Education Funding in Ohio

Ohio, like many states, is currently-considering deregulation of the retail electric power industry. This issue is made more complex in Ohio because structural change in the delivery of electric power is also likely to have a negative effect on state and local government revenues. This effect occurs because of three main forces: the elimination of differential property tax treatment of utilities relative to general businesses, the likely decrease in state electricity excise tax revenues as a result of falling power prices and administrative difficulty in taxing out of state providers, and the potential for stranded costs to diminish the taxable value of electric generating equipment. This article provides an overview of these issues and a brief analysis of the extent to which these problems will be shared by other states. The article then demonstrates the impact of deregulation-induced tax changes on both state and local school district revenues in Ohio and concludes with a discussion of how the state's ability to insulate local governments from these adverse fiscal effects is made both more imperative and more difficult by a recent Supreme Court Ruling on school funding Finally, the issues discussed in the article are placed in a more general context of the challenges of adjusting tax policy to changing circumstances     

Property tax in Indonesia: measuring and explaining administrative (under‐) performance

One of the arguments made by some Indonesian government officials in defence of continued central control over the property tax is that it has performed well under their authority and that its decentralisation would inevitably result in weaker operations and outcomes. The property tax has indeed grown remarkably well over the past 15 years. This growth, however, has been from a very low base, has been dominated by increased revenues from the mining sector and has been driven by a small number of sub‐national governments. Recently, only around 40% of local sector property tax potential has been realised under central control, given the existing tax rate and base. Property valuations are the most problematic aspect of administration but tax coverage and collections are also sub‐standard. While there may, in fact, be insufficient local government capacity to manage the property tax, even to current levels of performance, this problem could be solved by transferring the relevant central staff to local governments, as has been carried out in other newly decentralised sectors. But even before tax administration is devolved, local governments could at least be given some authority over the property tax rate, presently one of the lowest in the world. Copyright © 2003 John Wiley & Sons, Ltd.     

Subnational Taxes in Developing Countries: The Way Forward

Both theory and experience in a variety of circumstances around the world suggest strongly that if fiscal decentralization is to produce sustainable net benefits in developing countries, subnational governments require much more real taxing power than they now have. Students of public finance have studied the subject, and practitioners in developing countries have installed many different versions of subnational government tax. In most developing countries there are potentially sound and productive taxes that subnational governments could use: personal income tax surcharges, property taxes, taxes on the use of motor vehicles, payroll taxes, and even subnational value‐added taxes and local “business value” taxes may all be viable options in particular countries. Still, there is no general consensus about what works and what does not. In this review paper, we try and pull together enough evidence to suggest the way forward. We also develop the argument that given political realities one cannot usually decentralize significant revenues to subnational governments without having in place an intergovernmental transfer system to offset at least some of the disequalizing effects that would otherwise occur. Nor does it make sense to think of decentralizing exactly the same package of tax choices to all subnational governments regardless of their scale and scope of operations.     

Voter Responses to Referenda Seeking to Exceed Revenue Limits

Following voter approval of California's Proposition 13, a body of research has attempted to explain referenda outcomes aimed at restricting public sector tax and spending authority. Evaluating the determinants of voter attitudes toward referenda to exceed spending/revenue limits, however, has received little attention. Using data for all Wisconsin school districts, we examine the outcomes of referenda to exceed revenue caps. A key finding of our research is that when voters support bonding for capital expenditures, they tend also to approve referenda to override revenue limits. This enables school districts to cover new operating costs often associated with new capital projects.     

Property Tax Responses to State Aid Cuts in the Recent Fiscal Crisis

Many states experienced fiscal crises at the beginning of this decade. Some responded by cutting state aid to local governments. This paper explores the extent to which local governments responded to these aid cuts by raising property taxes. The authors hypothesize that changes in aid help explain the observed differences in per capita property tax revenue changes across states. They find that on average school districts increased property taxes by 23 cents for each dollar cut in state aid. These results highlight the important role that the property tax plays in maintaining the stability of the state and local sector.     

Urban local government finance in Nigeria: The case of Lagos municipal area

One of the most important results of the global reform of local governments in Nigeria in 1976 was to initiate a progressive increase in the amount of monetary transfers to local governments (LGs) by federal and state governments (especially the former). The proportion of federally collected revenues devoted to LGs increased rapidly from less than 2 per cent in 1976 to 15 per cent in 1990. This has enabled Nigerian LGs to play a more visible role in total public expenditures. On the other hand, huge federal transfers have led to sharp declines in absolute and relative terms in locally generated revenues. The two Lagos municipalities are able to generate up to 50 per cent of their total revenues. In contrast, the average for all local governments in the country is 4–5 per cent. The relatively large internal revenue sources in the two Lagos municipalities results in generous surpluses, which they are able to channel into capital development or special project expenditures. The single most important internal revenue source is the property tax, which is not even collected in some other large cities, such as Kano, Ogbomosho and Sokoto.     

Fiscal Exchange and Tax Compliance: Evidence From a Field Experiment

Behavioral interventions appealing to taxpayers’ reciprocity often leave tax compliance unaffected. We provide evidence that a “fiscal exchange nudge” increased tax compliance in a setting where one might not expect it: crisis-ridden Argentina. In a randomized controlled trial with over 20,000 taxpayers, a tax bill visually celebrating realized public works benefiting children increased payment rates of tax delinquents by about 20 percent, or almost 40 percent when the bills were delivered in person. Without the appeal, the new bill design generated significantly fewer payments. Changes in the design of the tax bill also increased arrears cancellation. We estimate the ratio of marginal revenues to costs for the fiscal exchange bill to be 18. The factors we associate with the unexpectedly positive impacts are consistent with strengthening an affective response. We find persistent effects of the experiment two years later. The results suggest that communities have more scope to increase tax revenues through non-threatening interventions.     

Wealth-Transfer Taxes in U.S. Fiscal Federalism: A Levy Still in Need of Reform

Wealth-transfer taxes are federal and state levies on the valueof estates, inheritances, and gifts. Because the federal governmentallows a limited tax credit, repeal of the federal tax has implicationsfor state governments. This article discusses the economic justificationof taxing wealth transfers and provides data on the importanceof the tax from 1977 to 1997. We measure the degree of variationin the use of the tax among the states and pinpoint those statesfor which death taxation is most important. Wealth-transfertaxation needs reform but, repeal of the federal tax is inappropriate.Instead, the state levies should be abandoned. We conclude byproposing to repeal the state taxes and reduce the federal taxby an amount equivalent to the value of the federal tax-credit.The resulting revenues, however, would not to be garnered bythe federal government but returned as revenue-sharing fundsto the resident state of the decedent.     

Broadening Benefits from Natural Resource Extraction: Housing Values and Taxation of Natural Gas Wells as Property

We study the effects of the property tax base shock caused by natural gas drilling in the Barnett Shale in Texas—a state that taxes oil and gas wells as property. Over the boom and bust in drilling, housing appreciation closely followed the oil and gas property tax base, which expanded the total tax base by 23 percent at its height. The expansion led to a decline in property tax rates while maintaining or increasing revenues to schools. Overall, each $1 per student increase in the oil and gas property tax base increased the value of the typical home by $0.15. Some evidence suggests that the cumulative density of wells nearby may lower housing values, indicating that drilling could reduce local welfare without policies to increase local public revenues.     

Changing State Fiscal Capacity and Tax Effort in an Era of Devolving Government, 1981 2003

The American system of fiscal federalism requires that stateand local governments finance the bulk of their budgets fromown-source revenues, not transfers. This article analyzes statetotal taxable resources from 1981 to 2003 to evaluate how statefiscal capacity has changed in that time and how it has beenaffected by national recessions, to examine the extent to whichfiscal capacity differs among states and whether capacity hasconverged, and to consider whether states have responded toservice demands by changing tax effort and whether tax efforthas converged in the face of interstate competition and otherharmonizing forces. Because the capacity measure employed herecan be compared across years, something impossible with majoralternative indices, the analysis provides insights importantto the analysis of fiscal federalism and of the implicationsof revenue devolution not previously possible.     

The Effects of Assessment Quality on Revenue Volatility

This paper examines the relationships between assessment quality, property tax revenue volatility, and other revenue volatility using panel data of all 100 counties in North Carolina between 2003 and 2007. Findings suggest that characteristics of the property tax base are the most important predictors of property tax revenue volatility among counties over time. Specifically, increases in assessed value and years in which a mass revaluation occurs are most influential in determining property tax revenue volatility. The second stage of analysis reveals that population, nontax revenue dependence, property tax dependence, and assessment quality have the greatest influences on volatility of other revenues among counties over time. The effect of assessment quality on nonproperty tax revenue volatility is conditional upon a county's property tax dependence.     

The Fiscal Consequences of Changing Federal and State Revenue Policies: The Case of Small Oregon Cities

This article examines the fiscal consequences for twelve, smallOregon cities of recent changes in federal and state intergovernmentalrevenue policies. Many small local governments have experienceddouble revenue reverses in recent years—reductions inown-source revenues because of economic decline as well as decreasesin intergovernmental revenues, especially federal aid. The twelvesmall cities are compared with all 241 cities in Oregon andthe 136 Oregon cities in the 1,000 to 49,999 population range.Using aggregate and interview data, a major finding is thatalthough stabilization and/or decline in federal-state revenuesharing and entitlement program funds have accentuated difficultlocal revenue situations, economic decline has been the moreimportant contributor to the fiscal stress of the twelve smallmunicipalities. Most of the twelve cities had limited fiscalcapacity—as indicated by low assessed property valuations—makingit difficult to produce sufficient revenue to meet basic publicservice needs. These cities were also unable to get citizenapproval of increases in property taxes.