Local Public Sector Performance: Are Wisconsin City and Village Taxes Too High?

This applied research project examines questions concerning the economic efficiency of municipal government spending and taxation levels in Wisconsin. Using economic notions of local government effectiveness and efficiency, a theoretical and empirical model is presented and estimated using data from Wisconsin cities and villages. Theory suggests that expenditure and taxation levels are capitalized into local property values. In short, public goods and services and corresponding taxes are viewed as a normal good in an economic sense: more is better, too much is bad. From a property valuation perceptive, higher levels of public goods and services should increase property values. But, overprovision of the public good places downward pressure on property values. This inverted-U relationship is easily estimated from an empirical perspective. Two separate tests are estimated. The first examines capitalization rates of service provision (i.e., expenditures) into property values. The second complementary test examines capitalization rates of taxation levels (i.e., municipal taxes) into property values. Results for Wisconsin cities and villages suggest that service and taxation levels are positively related to property values suggesting that neither services or local taxation is not systematically too high. In other words, based on rigorous economic theory, spending and taxing in Wisconsin's cities and villages are not too high and may indeed be too low. It is important to note that this applied research study focuses on city and village taxation and spending, attention is not paid to public schools, counties, towns or other special districts that have taxing authority.