Local Property and State Income Taxes: The Role of Interjurisdictional Competition and Collusion / Thomas J. Nechyba.

By:

Nechyba, Thomas J

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w5419.Publication details: Cambridge, Mass. National Bureau of Economic Research 1996.Description: 1 online resource: illustrations (black and white)Subject(s):

H7 - State and Local Government • Intergovernmental Relations

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: This paper attempts to address two long standing questions in Public Finance: (i) why is the property tax, despite popular complaints about its fairness, the almost exclusive tax instrument used by local governments, and (ii) why do we consistently observe higher levels of governments undermine local property tax systems through income tax funded grants and state imposed caps on local property tax rates. A new intuitive argument to explain (i) is presented and tested in general equilibrium simulations which utilize a compu- table general equilibrium model of local public finance with parameters set to be consistent with micro-tax data. Different types of agents are endowed with income and houses and are able to move to their most preferred house in their most preferred jurisdiction. Also, agents vote myopically on local property tax rates while non-myopic community planners set a local income tax. Six possible objective functions for community planners are postulated, and all 6 lead to the same equilibrium outcome: community planners will always set local tax rates at or close to zero. When faced with popular sentiment against the property tax, community planners can collude and introduce local income taxes simultaneously to prevent adverse general equilibrium migration and price changes. Since zero income tax rates are dominant strategies however, such an agreement is only enforceable if an outsider like the state government steps in. State grants funded through a state income tax can play such an enforcement role.

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Previous	nber w5416 Testing for Trade-Induced Investment-Led Growth /	nber w5417 Wage Dispersion and Technical Progress /	nber w5418 The Effect of Pharmaceutical Utilization and Innovation on Hospitalization and Mortality /	nber w5419 Local Property and State Income Taxes: The Role of Interjurisdictional Competition and Collusion /	nber w5420 A Computable General Equilibrium Model of Intergovernmental Aid /	nber w5421 Tariff Phase-Outs: Theory and Evidence from GATT and NAFTA /	nber w5422 How Well do Foreign Exchange Markets Function: Might a Tobin Tax Help? /	Next

January 1996.

This paper attempts to address two long standing questions in Public Finance: (i) why is the property tax, despite popular complaints about its fairness, the almost exclusive tax instrument used by local governments, and (ii) why do we consistently observe higher levels of governments undermine local property tax systems through income tax funded grants and state imposed caps on local property tax rates. A new intuitive argument to explain (i) is presented and tested in general equilibrium simulations which utilize a compu- table general equilibrium model of local public finance with parameters set to be consistent with micro-tax data. Different types of agents are endowed with income and houses and are able to move to their most preferred house in their most preferred jurisdiction. Also, agents vote myopically on local property tax rates while non-myopic community planners set a local income tax. Six possible objective functions for community planners are postulated, and all 6 lead to the same equilibrium outcome: community planners will always set local tax rates at or close to zero. When faced with popular sentiment against the property tax, community planners can collude and introduce local income taxes simultaneously to prevent adverse general equilibrium migration and price changes. Since zero income tax rates are dominant strategies however, such an agreement is only enforceable if an outsider like the state government steps in. State grants funded through a state income tax can play such an enforcement role.