Local property and state income taxes: The role of interjurisdictional competition and collusion

Nechyba, TJ

2010-03-09T15:43:16Z

1997-04-01

This paper addresses two long-standing positive questions in public finance: (i) Why is the property tax, despite widespread popular complaints against its fairness, the almost exclusive tax instrument used by local governments, and (ii) why do we consistently observe higher levels of governments (states) undermining local property tax systems through income tax-funded grants and state-imposed caps on local property tax rates? A new intuitive argument to explain question i is presented and tested in simulations using a computable general equilibrium model with parameters set to be consistent with New Jersey data. Both the intuitive argument and the simulation results indicate that setting local income tax rates to zero is a dominant strategy for community planners. When faced with popular sentiment against the property tax, community planners can collude and introduce local income taxes simultaneously to prevent adverse general equilibrium migration and price changes. Since zero income tax rates are dominant strategies, however, such an agreement is enforceable only if an outsider such as the state government steps in. The institution of state grants funded through a state income tax can play such an enforcement role.

application/pdf

0022-3808

https://hdl.handle.net/10161/2064

en_US

University of Chicago Press

Journal of Political Economy

Local property and state income taxes: The role of interjurisdictional competition and collusion

Journal article

351

384

2

Duke

Economics

Sanford School of Public Policy

Sanford School of Public Policy - Secondary Group

Trinity College of Arts & Sciences

Published

105