Abstract
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.
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I am grateful to Jerry Laurentano for his helpful discussions of Somerville politics. National Science Foundation Grant SBR-9309808 and the Tozier/Clark fund of Harvard University both provided helpful funding. Judith Chevalier and James Hines provided encouraging discussions. I particularly thank an anonymous referee for helpful comments.
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Glaeser, E.L. The incentive effects of property taxes on local governments. Public Choice 89, 93–111 (1996). https://doi.org/10.1007/BF00114281
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DOI: https://doi.org/10.1007/BF00114281