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Title: Community Heterogeneity and Local Response to Fiscal Incentives

Citation Type: Miscellaneous

Publication Year: 2003

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Abstract: One of the most important functions of local government is providing public education. There is, however, variation in preferences for school expenditure among different local groups. How the preferences of heterogeneous groups affect school spending is an important question for public policy. In this paper, I examine the unintended effects of a tax relief program in New York State that lowered the marginal cost of educational expenditure to homeowners by paying a portion of their property taxes to school districts. I find these fiscal incentives had statistically and economically significant effects on local government behavior; school expenditures rose by 1.6% on average in response to the state paying 10% of all local property taxes. Moreover, I find that the distribution of tax relief across local taxpayers and the mobility of non-residential property were important determinants of local response. My results suggest that, as a group, homeowners are relatively more influential on local decisions to increase expenditure than renters or owners of non-residential property, and that local taxpayers perceive significantly higher long-run costs to raising taxes on commercial and industrial property relative to more immobile property, such as vacant land. These findings highlight a potentially important issue that has received little attention in the literature on fiscal federalism: policies that seek to change local public expenditure may be made more effective by focusing on the preferences of more influential groups of local taxpayers.

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Authors: Rockoff, Jonah E.

Publisher: Harvard University

Data Collections: IPUMS USA

Topics: Education, Housing and Segregation

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