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The Incentive Effects of Property Taxes on Local Governments

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  • Edward L. Glaeser

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4987.

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Date of creation: Jan 1995
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Publication status: published as Public Choice, Vol. 89, nos. 1/2 (October 1996): pp. 93-111.
Handle: RePEc:nbr:nberwo:4987

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  1. Fischel, William A., 1989. "Did Serrano Cause Proposition 13?," National Tax Journal, National Tax Association, vol. 42(4), pages 465-73, December.
  2. Brennan, Geoffrey & Buchanan, James M., 1978. "Tax instruments as constraints on the disposition of public revenues," Journal of Public Economics, Elsevier, vol. 9(3), pages 301-318, June.
  3. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922.
  4. Downes, Thomas A., 1992. "Evaluating the Impact of School Finance Reform on the Provision of Public Education: The California Case," National Tax Journal, National Tax Association, vol. 45(4), pages 405-19, December.
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