Tax Deductibility and Municipal Budget Structure
This paper investigates the effects of deductibility of local taxes on communities' budgetary decisions. Our focus is on how changes in the tax price of local spending induced by deductibility affect the mix between deductible and nondeductible revenue sources, and on expenditures. The econometric analysis is based on a rich data set that tracks the fiscal behavior of 172 local governments from 1978 to 1980. We find that the elasticity of deductible taxes with respect to the tax price is in the range -1.2 to -1.6; the tax price has no statistically significant effect on the use of nondeductible revenue sources; and the elasticity of local expenditures with respect to the tax price is about -1.8. Hence, if deductibility were eliminated, we would expect to see a substantial decline in local government spending.
|Date of creation:||Apr 1987|
|Date of revision:|
|Publication status:||published as Holtz-Eakin, Douglas and Harvey S. Rosen. "Tax Deductibility and Municipal Budget Structure," Fiscal Federaalism: Quantitative Studies, edited by Harvey S. Rosen. Chicago: UCP, 1988.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Daniel R. Feenberg & Harvey S. Rosen, 1985. "The Deductibility of State and Local Taxes: Impact Effects by State and Income Class," NBER Working Papers 1768, National Bureau of Economic Research, Inc.
- Robert P. Inman, 1985. "Does Deductibility Influence Local Taxation?," NBER Working Papers 1714, National Bureau of Economic Research, Inc.
- Martin Feldstein & Gilbert Metcalf, 1986.
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NBER Working Papers
1791, National Bureau of Economic Research, Inc.
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- Metcalf, Gilbert & Feldstein, Martin, 1987. "The Effect of Federal Tax Deductibility on State and Local Taxes and Spending," Scholarly Articles 2766699, Harvard University Department of Economics.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
- Hettich, Walter & Winer, Stanley, 1984. "A positive model of tax structure," Journal of Public Economics, Elsevier, vol. 24(1), pages 67-87, June.
- White, Halbert, 1982. "Instrumental Variables Regression with Independent Observations," Econometrica, Econometric Society, vol. 50(2), pages 483-99, March.
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