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Federal Deductibility and Local Property Tax Rates

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Author Info
Douglas Holtz-Eakin
Harvey S. Rosen

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Abstract

In current discussions of tax reform in the United States, there is considerable controversy concerning the effects of allowing individuals to deduct state and local taxes when calculating their federal income tax liability. Recent econometric work has suggested that federal deductibility of state and local taxes has raised the proportion of these taxes -- especially property taxes -- in local budgets. This paper lends additional support to these earlier findings by showing that one channel through which deductibility leads to higher local property tax revenues is by increasing the rate of local property taxation. Specifically, we find that if deductibility were eliminated, the mean property tax rate in our sample of 82 communities would fall by 0.00715 ($7.15 per thousand dollars of assessed property), or 21.1 percent of the mean tax rate.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2427.

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Date of creation: Dec 1990
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Publication status: published as Journal of Urban Economics, Vol. 27, No. 3, pp. 269-284, (May 1990).
Handle: RePEc:nbr:nberwo:2427

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  1. Feldstein, Martin S & Metcalf, Gilbert E, 1987. "The Effect of Federal Tax Deductibility on State and Local Taxes and Spending," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 710-36, August. [Downloadable!] (restricted)
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  2. Bergstrom, Theodore C & Goodman, Robert P, 1973. "Private Demands for Public Goods," American Economic Review, American Economic Association, vol. 63(3), pages 280-96, June.
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  3. Douglas Holtz-Eakin & Harvey S. Rosen, 1987. "Tax Deductibility and Municipal Budget Structure," NBER Working Papers 2224, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Hettich, Walter & Winer, Stanley, 1984. "A positive model of tax structure," Journal of Public Economics, Elsevier, vol. 24(1), pages 67-87, June. [Downloadable!] (restricted)
  5. Robert P. Inman, 1985. "Does Deductibility Influence Local Taxation?," NBER Working Papers 1714, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Borge, Lars-Erik & Rattso, Jorn, 2001. "Income Distribution and Tax Structure: Microeconomic Test of the Meltzer-Richard Hypothesis," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  2. Thomas J. Nechyba, 1996. "A Computable General Equilibrium Model of Intergovernmental Aid," NBER Working Papers 5420, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Robert P. Inman, 1990. "The Local Decision to Tax: Evidence from Large U.S. Cities," NBER Working Papers 2921, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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