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Tax Effort as an Indicator of Fiscal Stress

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  • Earl D. Benson
  • Barry R. Marks
  • K. K. Raman

Abstract

The most visible credit market measure of the fiscal health of a municipality is the credit rating. In this article we ask whether the credit rating fully incorporates the fiscal stresses faced by municipal governments. We utilize state “tax effort†as a measure of the fiscal stress faced by a municipality. The findings suggest that municipalities located in states characterized by poor fiscal health pay higher than average interest costs on their bond issues (holding credit rating constant). State “tax effort†seems to reflect elements of fiscal stress that are not adequately taken into account through the rating process.

Suggested Citation

  • Earl D. Benson & Barry R. Marks & K. K. Raman, 1988. "Tax Effort as an Indicator of Fiscal Stress," Public Finance Review, , vol. 16(2), pages 203-218, April.
    • Handle: RePEc:sae:pubfin:v:16:y:1988:i:2:p:203-218
    DOI: 10.1177/109114218801600204
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    References listed on IDEAS

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    1. Timothy Q. Cook, 1982. "Determinants of individual tax-exempt bond yields : a survey of the evidence," Economic Review, Federal Reserve Bank of Richmond, vol. 68(May), pages 14-39.
    2. Kidwell, David S & Trzcinka, Charles A, 1982. "Municipal Bond Pricing and the New York City Fiscal Crisis," Journal of Finance, American Finance Association, vol. 37(5), pages 1239-1246, December.
    3. Wilson, Er & Howard, Tp, 1984. "The Association Between Municipal Market Measures And Selected Financial-Reporting Practices - Additional Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 22(1), pages 207-224.
    4. Kessel, Reuben, 1971. "A Study of the Effects of Competition in the Tax-exempt Bond Market," Journal of Political Economy, University of Chicago Press, vol. 79(4), pages 706-738, July-Aug..
    5. Benson, Earl D, 1979. "The Search for Information by Underwriters and Its Impact on Municipal Interest Cost," Journal of Finance, American Finance Association, vol. 34(4), pages 871-885, September.
    6. Ingram, Rw & Copeland, Rm, 1982. "Municipal Market Measures And Reporting Practices - An Extension," Journal of Accounting Research, Wiley Blackwell, vol. 20(2), pages 766-772.
    7. Wallace, Wa, 1981. "The Association Between Municipal Market Measures And Selected Financial-Reporting Practices," Journal of Accounting Research, Wiley Blackwell, vol. 19(2), pages 502-520.
    8. Kidwell, David S. & Trzcinka, Charles A., 1983. "The Impact of the New York City Fiscal Crisis on the Interest Cost of New Issue Municipal Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(3), pages 381-399, September.
    9. Benson, Earl D. & Kidwell, David S. & Koch, Timothy W. & Rogowski, Robert J., 1981. "Systematic Variation in Yield Spreads for Tax-Exempt General Obligation Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(5), pages 685-702, December.
    10. Epple, Dennis & Spatt, Chester, 1986. "State restrictions on local debt : Their role in preventing default," Journal of Public Economics, Elsevier, vol. 29(2), pages 199-221, March.
    11. Benson, Earl D. & Marks, Barry R. & Raman, K. K., 1984. "State regulation of accounting practices and municipal borrowing costs," Journal of Accounting and Public Policy, Elsevier, vol. 3(2), pages 107-122.
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    Cited by:

    1. Mustafa Kiziltan & Ahmet Burcin Yereli, 2023. "Evaluating local fiscal capacity and fiscal effort of Turkish local governments: Evidence from spatial panel data analysis," Economic Change and Restructuring, Springer, vol. 56(1), pages 441-472, February.
    2. Mullen, John K., 1990. "Property Tax Exemptions and Local Fiscal Stress," National Tax Journal, National Tax Association, vol. 43(4), pages 467-79, December.
    3. Mullen, John K., 1990. "Property Tax Exemptions and Local Fiscal Stress," National Tax Journal, National Tax Association;National Tax Journal, vol. 43(4), pages 467-479, December.
    4. Stéphanie Serve, 2002. "Le recours au financement désintermédié par une collectivité locale et l'évaluation de la prime de risque obligataire: le cas de la ville de Marseille," Revue Finance Contrôle Stratégie, revues.org, vol. 5(2), pages 107-142, June.
    5. Yaw Badu & Sheng Li, 1994. "Fiscal stress in local government: A case study of the tri-cities in the Commonwealth of Virginia," The Review of Black Political Economy, Springer;National Economic Association, vol. 22(3), pages 5-17, March.

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