PROPERTY TAXATION, PROPERTY BASE, AND PROPERTY VALUE: AN EMPIRICAL TEST OF THE NEW VIEW

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1 PROPERTY TAXATION, PROPERTY BASE, AND PROPERTY VALUE: AN EMPIRICAL TEST OF THE NEW VIEW ROBERT W. WASSMER* Abstract The Traditional, New, and Benefit Views of property taxation yield different predictions in regard to the effects of property taxation, An empirical test for evidence on the predicted effects of the New View is given. Results support the New View and indicate that ( 7) the greater the positive differential between a city s rate of property taxation and the nation s average rate, the smaller the amount of capital in the city and the smaller the perunit market value of its property tax base; and (2) the higher the average rate of property taxation in the country, the lower the return to all property. Simulations regarding revenue alternatives vided. to the PweQ tax are a/so pro INTRODUCTION Property taxation is controversial in the United States. Reasons for this controversy are numerous. Property taxes are highly visible and usually assessed on a household s biggest consumption item and a household s or firm s biggest investment item. Assessment of the stock of property has inevitably led to horizontal inequities. *Wayne State Umverslty, Detroit, MI The fact that property taxes in the United States are the primary source of local funding for probably the most valued government service, K12 public education, also contributes to the debate surrounding them. In addition to the discord caused by the institutional arrangement of property taxes, policymakers believe that the incidence of the property tax is regressive. Many elected officials also contend that an excessive rate of property taxation discourages local economtc development by driving out property, employment, and population. Property taxation is also a controversial political topic because of these two widely accepted beliefs. Economists have responded to this controversy by developing theories on the incidence of property taxation. Unfortunately, the three basic theories or Views developed in regard to property taxation yield quite different predictions on the effects of the tax. The Traditional View, popularized by Netzer (1966), finds that owners of the capital portion of taxed property bear no burden of the tax since it is passed fully forward to capital renters. The conclusion that the property tax is regressive follows because the poor generally spend a greater 135

2 portion of their income to rent capital than the rich. Alternatively, the New View, presented by Mieszkowski (1972) and popularized by Aaron (1975), finds that the owners of all property bear some burden of the tax. The finding that property taxes are progressive follows, since the rich obtain a greater portion of their income from capital ownership than the poor. The more recent Benefit View, introduced by Hamilton (1975, 1976) and discussed by Fischel ( I 987, 1992), quite distinctly concludes that property taxes can be a form of efficnent user charges for local public services. If such is the case, the incidence of the property tax is of much less concern. Mieszkowski and Zodrow (1989) have written a comprehensive survey on the three basic theoretical views of the property tax and the many extensions made to them. They conclude that.the Traditional View is (only a variation of the New View and that the Benefit View is entirely valid only if a binding form of local zoning or perfect capitalization exists. Mieszkowski and Zodrow s support of the New View of property taxation is based on their belief that perfect zoning and capitalization do not exist in the United States. As pointed out in their survey, there is a need for a welldevised investigation to test this opinion and provide some empirical measure of the validity of the New View. The purpose of this paper is to present the derivation and result of an empirical test of the type called for by Mieszkowski and Zodrow. The goal of the empirical test is t.o identify elasticity measures that can, in principle, measure the predicted effects of property taxation obtained from the New View of property taxes. If these elasticity measures are not statistically different from zero or differ in the predicted direction of the effect, then the Benefit View may be the more appropriate way to model the effects of property taxation. To better understand the denvation of this empirical test, a brief discussion of the Traditional, New, and Benefit Views of the property tax is given first. Following this, the conceptual framework behind the empirical test is presented. The next section contains a description of data used in the estimation, econometric issues considered before estimation, and the results of the estimation. Simulations regarding an exogenous increase in property taxation and alternatives to the property tax are then presented. THE TRADITIONAL, NEW, AND BENEFIT VIEWS OF THE PROPERTY TAX The Traditional View of the property tax uses a differential rnethod of tax incldence analysis. This method ignores the benefits received by those paying taxes, because benefits are (assumed to display little relationship to the amount of taxes paid. The Traditional View of the property tax examines the effect of replacing a lumpsum or nondistortionary form of taxwith a distortionary property tax. The Traditional View originates in the partialequilibrium framework of one taxing jurisdiction. The analysis considers property taxes to be separate payments on capital and land. The supply of capital to any jurisdiction is modeled as perfectly elastic at a nationally determined rental rate paid to owners of capital (rn). Figure 1 contains the effect in a city that enacts an ad valorem property tax (t) on capital. The demand for capital decilines by the percentage amount of the tax (D to D ) and the grossoftax rental rate paid by capital renters rises io absorb the entire tax increase (rn to fn( t t)). If a city enacts a property tax on its perfectly inelastic supply of land, the result is perfect capitalizationthe rental rate paid to owners of land falls by the entire tax increase (rfi4 to rn(l!)). Under these traditional assumptions, the effect of instituting a properly tax in a city (or raising the rate 1 136

3 AN EMPIRICAL TEST OF THE NEW VIEW I FIGURE 1. The TraditIonal View of a Property Tax on Capital rn (l+t) of an existing property tax) is to reduce the amount of assumed perfectly mobile capital in the jurisdiction (K, to K,). The rental rate paid to owners of local capital (or the related market price of local capital) does not change. The rental rate paid to owners of land in the city (or the market price of land) falls. The New View of the property tax distinguishes itself through the use of a general equilibrium analysis of all jurisdictions in a country. A country s supply of taxable capital is considered fixed and perfectly mobile in the long run. Each jurisdiction also contains a fixed amount of taxable land. The remaining discussion of the New View is based primarily on Zodrow and Mieszkowski s (1986) reformulation of Mieszkowski s (1972) original article. Zodrow and Mieszkowski assume that there are N different types of demanders of a locally provrded service that have separated themselves into N different jurisdictions. Initially, the locally provided service is funded through a head tax. As first described by Tiebout (1956), this results in an efficient allocation of individuals to jurisdictions. The ownership of land and capital is not restricted to the city of residence. For simplicity, assume that (1) each jurisdiction begins with an equal amount of land and capital, (2) the rental elasticity of capital demand is equivalent in each jurtsdiction, and (3) there are only three types of demanders of the locally provided service. Low types of demanders prefer the local service at 50 percent below the level preferred by medium types, while high types prefer the local service level at 50 percent above the medium service level. Figure 2 contains one city for each type of demander. The head tax in the jurisdiction with 137

4 FIGURE 2. The New View of Property Taxation 'H,3 5J 'H,2 'H,l I?1 PO Hi.ghType po MediumType po p1 :LowType D D' hightype demanders is necessarily 200 jpercent higher than the head tax in the jurisdiction with lowtype demanders. Capital mobility Insures that the rental rate paid to owners of capital (rj is constant across all three jurisdictions in the long run. A head tax has no effect on each city s property market. Now consider the outcome of an exogenous requirernent that a certain percentage of revenue, formerly raised by the head tax, be raised by an advalorem tax on property. The mediumtype city would Institute the average rate of property taxation. The rate of property taxation in the high and lovvtype cities would, respectively, be 50 percent higher and lower. Since capital ownership is not restricted to the jurisdictron in which residents live and there are no local ordinances on the amount of capital that a homeowner or firm must have, this is also a form of drfferential incidence analysis. In Figure 2, the supply of taxable property (the amount of property is represented by a P ) represents both the supplies of capital and land in the city. Property supplies are fixed in the short run. The result of revenue being partially raised by a property tax is a shift in the property demand curve in each city (D to D ). After the decrease in demand, ihe rental rate paid to owners of property ii7 the mediumtype city falls from h to hl. Zodrow and Mieszkowrki refer to this as the profits tax effect that depresses the market value of property throughout all cities by the averrjge rate of taxation. In the hightype jurisdiction, the rental rate paid to owners of property falls to an r,,, that is lower than the rm,, in the mediumtype city. The negative differential between rh,, 1t1 the hightype city and r,,,,, in mediurntype city is an excise tax effect due to the higher property tax rate in the high.iype city.2 In the lowtype jurisdiction the rental rate paid to owners of property lalls to a higher rl,, than rm,, in the mediumtype jurisdrction. This higher rate reflects the sum of the nationwide profits tax effect and a positive excise tax effect. So far, the analysis has been based on the shortrun assumption of a fixed supply of property in a community. If owners of taxable capital receive differential rental rates in three cities, there IS an incentive for mobility. In the long run, owners of capital in the hightype city will relocate their capital investments to the lowtype city. This shifts the short run property supply curves (S, to S,). Supplyside equilibrium is achieved when the rent paid to owners of property

5 AN EMPIRICAL TEST OF THE NEW VIEW I is equalized at rh.2 and rl,2 in the high and lowtype cities, which equals rm,, in the mediumtype city. The New View yields empirically testable predictions on the effect of property taxation on a city s aggregate property base and property value. Holding local capital and land fixed, an increase in the local rate of property taxationthat replaces a nondistortionary form of taxationdepresses a city s aggregate value of property by the average rate of property taxation. A city s aggregate value of property will be even lower in the hightype city and higher in the lowtype service city. Allowing for capital mobility after an increase in property taxation, the profits tax effect implies that the aggregate value of taxed property will be lower in all cities. Due to excise tax effects, the aggregate property base in the hightype service city will be even lower while the aggregate property base in the lowtype service city will be somewhat higher than implied by the profits tax alone. At this point in the analysis, the rental rate paid by renters of taxable property is highest in the hightype city (at r,,j, and lowest in the lowtype city (near rl,,). If the sorting of individuals to city types does not result in perfectly homogenous communities, residents may now be able to increase their utility by moving between cities.3 Residents for which the higher rental rate of T,,~ is not offset by higher service levels would migrate to other cities, causing the rental rates to move closer together but not necessarily converge. The convergence of rental rates paid by demanders would cause another round of the supply shifts just described. Since all high service demanders do not wish to move to lower service cities, a longrun equilibrium with excise tax rent differentials on local property demanders is likely to persist.4 The final view of property taxation, Benefit View, uses the assumptions or the of the New View but places additional restrictions on property ownership and pricing. As given by Hamilton (1975, 1976), these restrictions include perfect fiscal zoning or perfect fiscal capitalization. Perfect fiscal zoning allows a city to restrict residential capital (housing units) to some minimum value. In a Tiebout world, homes greater than this value would not be built in the city because through property tax financing, they would pay a greater price for city services. Perfect fiscal capitalization occurs in a fully developed heterogeneous housing community when the fiscal surplusthe excess of local service benefits over local property tax payments for a small house in a typically large house communityis capitalized into a higher rental rate (or market price) than the same small house would earn in a homogenous small house community. Fiscal deficits for relatively large houses are also negatively capitalized in the heterogeneous community. In essence, binding fiscal zoning and/or perfect capitalization turns the property tax into the head tax or nondistortionary user charge that Tiebout (1956) imagined for the provision of local residential services. If either occurs, all jurisdictions in a Tiebout world would be equal in regard to the perunit, aftertax cost of residential capital. Jurisdictions would also be homogenous in regard to residents demand for the locally provided service. White (1975) and Fischel (1975) have extended Hamilton s line of reasoning to the taxation of firm property. Assuming perfect fiscal zoning in regard to all types of property, a pure Benefit View of property taxation performs a balancedbudget incidence analysis of the property tax by considering that property taxes paid by demanders of residential and firm property are equivalent to the benefits they receive through the city s expenditures. If this is the case, the exogenous adoption of a partial property tax by the three communities shown in Figure 2 should have no ef 139

6 feet on the demand for property in each community. Under perfect fiscal capitalization in fully developed heterogeneous cities, the Benefit View of property taxation implies that local property tax dbfferentials will be capitalized tnto individual local property values. Relatively large (small) homes in a heterogeneous city would sell at a discount (premium). As given by Hamllton (19 76), in the aggregate, these individual capitalization effects cancel so that the net effect on total city property tax base from shifting to a property tax should be zero, despite a multitude Iof negative and positive capitalization effects on individual properties. Therefore, the Benefit View also yields empirically testable predictions on the effect of property taxation on a city s aggregate property value and amount. A shift to property taxation (or alternatively a revenue neutral increase in the rate of property taxation that lowers an alternative local tax) should have no effect on a city s aggregate unit value of property and no effect on a city s aggregate property amount. Note that this absence of aggregate effects IS in stark contrast to the profits and excise tax effects predicted by the New View of property taxation. Local service levels are reflected in higher aggregate local property values in both the New and Eenefit Views But, only under the New Vew should tlhe method or rate of property taxation affect aggregate property val Uf!S. In the past, economists have evaluated the merits of the 13enefit View based on evidence of perfect fiscal zoning or capitalization. Mieszkovvski and Zodrow (1989) have argued that there is little evidence to support perfect fiscal zoning and capttalizaton. Flschel (1987, 1992) has responded with a long and impressive list of institutional evidence demonstrating the pervasiveness of fiscal zoning in the United States. Beginning with Oates (1969), capitalization studies have shown that, ceteris pdribus, Increased local expenditures increase individual and aggregate local property values, while increased local property taxation decreases individual and aggregate local property values. The capitalization of local property tax rates into indiv~~dual local property values can conceivably occur under both I he New View and the Benefit View of the property tax that relies on perfect fiscal capitalization within heterogeneous jurisdictions. The validity of the New View of property taxation remains to be shown through an empirical test for evidence on the aggregate excise and profits tax effects predicted specifically by the New View and not expected to occur under the Benefit View. THE CONCEPTUAL FRAMEWORK OF THE EMPiRICAL TEST It would be difficult to prove that only the New View of property taxation is valid and to consequently disprove the Benefit View entirely. E!ven if evidence in support of the New View is found, the magnitude of this evidence rnay have been mitigated by offsetting effects predicted by the Benefit View. Therefore, a reasonable null hypothesis to test is that the New View is entirely Invalid. Rejecting this null hypothesis requires proof of the existence of the aggregate effects predicted specifically by the New View A rejection of this null hypothesis does not dismiss the possibility of effects predicted by the Benefit View. As Wildasin ( 1986) has suggested, under irnperfect zoning and imperfect capitalization, the choice between the New and Benefit Views may not be absolute and the property tax may best be c:onsidered a combination capital tax and user charge. The objective here is to look for empirical proof to support the claim that the property tax is, in part, a capital tax. As shown earlier, under the New View, a national system of property taxation at different local rates exerts two effects. Hold Ing the amount of property in the country 140

7 AN EMPIRICAL TEST OF THE NEW VIEW I constant, the profits tax effect depresses any owner s perunit rental rate (or perunit market price) of property by the average effective rate of property taxation in the country. Holding the amount of property constant in each jurisdiction, the predicted excise tax effects are that local property tax rates above the national average depress the perunit market price of property further while local rates below the national average raise the perunit market price above that indicated by the profits tax effect. Under the Benefit View of property taxation, the national average rate of property taxation and local deviations from this rate should have no effect on the perunit market price of aggregate local taxable property. Proof of an excise or profits tax effect is sufficient evidence to reject the null hypothesis that the New View of property taxation is invalid. The prescribed empirical test is to seek evidence of a profits and/or excise tax effect on the perunit market price of property and the amount of property in a city. The test presented here is motivated by Brueckner s suggestion included in Mieszkowski and Zodrow (1989, p. 1131). Brueckner suggests that the tax effects predicted in the New View, and not the Benefit View, can be sorted out by focusing on intermetropolitan rent differences. At an intermetropolitan level, the Benefit View predicts that local property rents depend on construction costs, local expenditures per household, and other demand characteristics. As discussed earlier, with a local budget identity and assuming efficient production, how local revenue is raised, or the rate of local property taxation, should exert no influence on aggregate property value.* On the other hand, the New View indicates that the rate of property taxation exerts distinct profits and excise tax effects. A problem arises in finding an appropriate measure of the perunit aggregate price of property. The solution is that the market value of a community s property, holding the amount of property constant, is directly related to the perunit aggregate market price of property. As given in equation 1, the aggregate market value of city i s property tax base (PTB) is expected to be a positive function of the quantity (supply) of propertycapital (K) and land (L)in the city and a positive function of a Jlength vector of variables (0,; where i = 1, 2, 3, J) that determines the demand for property in the city: PTB, = PTB(K,, L,, O,,,, As shown using Figure 2, holding property constant, the New View predicts that the national average rate of property taxation (APT) and city i s rate of property taxation less APT (DAPT) have a negative effect on the demand for property and hence on the market value of the property tax base. Under both the New View and Benefit View of property taxation, the level of local expenditure levels per unit of property (EXP) should increase property demand and PTB. Assuming that property is a normal good, the level of individual income (Y) in the city would also increase property demand and PTB. If there is any shifting of tax incidence to producers, the existence of other forms of local taxationa local sales tax (STAX) and/or a local income tax (ITAX)could reduce property demand and PTB. Ladd and Bradbury (1988) point out that city property owners receive services in return for paying taxes to overlapping special districts, school districts, county governments, and state governments. Ceteris paribus, this rate of overlapping government (OVTAX) should exert an additional influence on PTB. A high rate of crime (CM) would reduce property demand and PTB. The city s population (POP) represents the number of aggregate residential property demanders. Replacing 0, in equation 1 with the just described vector of demand variables results in the following: 141

8 PTB, = PTB(K,, L,, DAPT,, EXP,, Y,, STAX,, ITAX,, OVTAX,, CM,, POP,). E.quatilon 2 does not include APT, because, in a cross section of cities, it is constant.lz The prescribed test of the null hypothesis is to estimate equation 2 using a national sample of cities and to check the derived relationship between PTB and DAPT. If PTB is negatively Irelated to DAPT, the null hypothesis that the New View is entirely inappropriate can be rejected.13 An additional problem to estimating equation 2 is the,ssmultanerty that exists among some of the explanatory variables. Capital (K) is endogenous because capital mrgration into a city may be negatively related to the endogenously determined excise tax effect (DAPT). Controlling for local taxes, residential and business capital may also be attracted to a high service city (EXP). Holdng all else constant, residential capital is (also expected to be larger in a high income (Y) city The difference between a city s effective property tax rate and the average rate Iof national property taxation I(II) is expected to be greater the lower the city s property tax base (PTB) and the Ihigher the city s expenditure per unit of property (EXP) A city s expenditure per unit of property (EXP) is positively determined, in part, by its level of indrvidual income (Y). EXP may also be positively or negatively related to DAPT.14 Accounting for capital and labor complementanty in production, local personal ilqcome (Y) is related to the amount and type of business capital (K) in the city. The marginal product of labor, and hence person,al income, should be larger the greater the arnount of capital in the city. If equation 2 is estimated without taking 1 hese endogenous relationships into consideration, the regression coefficients on the endogenous variables will be inconsis tent. A silnultaneous equation estimation is therefore necessary. The first r>tep to estimate the system of simultaneous equations is to specrfy, in general functional form, the four rernaining equations that represent the determination of the endogenous variables. This is done in equations 36: R K, = K(DAPT,, EXP,, Y,,, STAX,, ITAX,, OVTAX,, AREA,, CM,, POP,) R DAPT, = DAPT(PTB,, EXP,, STAX,, ITAX,, IGOV,, OVTAX,, SENR,, OWN,, MAN&) R EXP, = EXP(DAPT,, Y,, STAX,, ITAX,, OVTAX,, IGOV,, CM,, SENR,, CHILD,, EDUC,, MIANUF,) R 0 Y, = Y(K,, SENR,, CHILD,, EDUC,, MANUF,) As given In equation 3, besides the endogenous relationships just described, local and state taxes could also drive out capital and cause it to be negatively related to a local sales tax (STAX), local income tax (IlAX), and the rate of overlappirlg taxes (OVTAX). The amount of residential and business capital in a city is likely to be positively related to its square miles (AREA) and negatively rela ted to its crime rate (CM). The amount of residential capital is also positively related to the city s population (POP) As given I~I equation 4, the difference between a city s local property tax rate and the natiorl s average rate of property taxation is expected to be negatively related to the availability of alternative tax iirstru 142

9 AN EMPIRICAL TEST OF THE NEW VIEW I ments (STAX and ITAX), the percentage of a city s revenue garnered from intergovernmental revenue sharing (IGOV), and the degree of services (proxied by the degree of taxation) offered by overlapping jurisdictions (OVTAX). A city s degree of property tax reliance should also be related to the percentage of residents over 65 (SENR) and the percentage of owneroccupied homes (OWN). Due to relatively larger property holdings, fixed incomes, and the lack of schoolage children, senior citizens are more likely to direct city officials to limit property taxation. Homeowners, as opposed to renters, may also be more likely to demand limited property taxation due to their perception of a direct tax burden. As Ladd (1975) and others have shown, the composition of the local property tax base should also have an impact on the rate of property taxation. Controlling for the size of the property tax base, a higher percentage of people employed in manufacturing (MANUF) would indicate a larger manufacturing property tax base and perhaps a tendency to rely less on property taxes due to the fear of driving more mobile manufacturing firmsas opposed to less mobile commercial firmsout of the community. As given in equation 5, a city s expenditure per unit of property is also expected to be related to other local revenue alternatives (STAX and ITAX). Due to the general form of the EXP function, these relationships could be either positive or negative. Local expenditure per unit of capital should also be negatively related to the degree of substitute expenditure offered by overlapping jurisdictions (OVTAX). EXP is expected to be positively related to the percentage of total revenue coming from outside grants (IGOV). The greater the value of IGOV, the greater the percentage of revenue raised through tax exportation to nonresidents. Though the direction of the influence is unpredictable, expenditure should also be influenced by exogenous forces that can be measured by the rate of crime (CM). Using the standard model of a decisive voter, city expenditure would also be related to the characteristics of this voter. These are proxied for by the percentage of the population greater than age 65 (SENR), the percentage of the population less than age 18 (CHILD), and the percentage of population with greater than a high school education (EDUC). The influences that these variables exert could take many avenues and are considered unpredictable. Though also unpredictable in direction, MANUF should also influence a city s expenditure. Equation 6 is a production function for local family income (Y). A predominantly older (SENR) or younger (CHILD) population should produce lower Y, while a more educated (EDUC) population should produce greater Y. Considering the greater value added in manufacturing, a larger MANUF could produce a higher Y. Alternatrvely, considering the economic decline in primarily manufacturing cities, a larger MANUF could predict a lower Y. DATA, ECONOMETRIC REGRESSION RESULTS ISSUES, AND In the system of simultaneous equations, there are five endogenous variables (PTB, K, DAPT, EXP, and Y) and 13 exogenous variables (STAX, ITAX, OVTAX, IGOV, AREA, CM, SENR, OWN, CHILD, EDUC, HPLUM, HROOM, and MANUF).16 Each of the endogenous variable equations (26) is overidentified for both the rank and order conditions. The system can be estimated using the method of twostage least squares (TSLS) and U.S. cities as the unit of observation. Due to jurisdictronal differences in the rate of property assessment and variance in the accuracy of cities achieving their specific assessment ratios, it is difficult to get a property base measure that is comparable across U.S. cities.17 The quinquennral Census of Governments contains the solution 143

10 to the problem of property tax base comparability. In the volume titled Taxable Property Valwes and AssessmentSales Price Ratios, the U.S. Census Bureau reports the results of a survey that measures the average assessment to sales price ratio for real business and residential property in a select groulp of cities.18 The survey s purpose was to Icorrect the comparability problem discussed earlier. Unfortunately, the survey was terminated after 1981 and real business property was excluded before The desired statistics are only available for limited cities for periods 5 years apart between 1966 and I9 A pooled data set is necessary to obtain the necessary degrees of freedom. T he initial objective was to gather data from the 200 most populated U.S. cities in 1986.* It was only possible to gather the appropriate salesassessment ratios for some of these cities To calculate PTB, it was then necessary to multiply each city s salesassessment ratio by its gross value of all locally assessed real property 21 Nonre Iporting of this variable further reduced the original sample of 2100 cities. Table 1 contains the final sample of 62 cities included in one of the four cross sections: The effective rate of real property taxation in each city is equal to the property tax payments made to the city divided by the calculated PTB and rnultiplied by 1OO.23 The average rate of property taxation is measured as the mean effective property tax rate across all cilies in a cross section. Table 1 contains the calculated effective property tax rates for each city in each cross section. 4 Table 1 also includes the mean and standard deviation of effective property taxation in a given year. Notice the general decline in both of these statistics. DAPT equals the city s effective property tax rate rninus the mean for that cross section.25 A further issue to consider is the appropriate proxy measure for the amount of city capital. Two possibilities come to mind. The number of homes could roughly measure the city s residential capital, while employment could approximate the city s businesi capital. In the sample of cities, homes and employment exhibit a simple correlation coefficient of Since both essentially measure the same vanation, the number of homes was chosen as the appropriate proxy for K. HOMES is a more direct measure and avoids the substitutability issue that arises if employment is used to proxy for business capital. If this measure is to be used effectively, local capital differences that are not picked up by HOMES need to be controlled for. This is done by including the percentage of a city s housing that is owner occupied (OWN), the percentage of a city s housing that lacks complete plumbing (HPLUM), the median number of rooms in a yearround housing unit in the city (HROOM), and a proxy for the percentage of a c:ity s nonresidential capital that is used in manufacturing (MANUF). HROOM and MANUF should be related to a more valuable local capital stock. HPLUM should be related to a less valuable capital stock The effect of OWN on PTB is uncertain. HPLUM is also included in the HOMES regressions as an approximation of the age and quality of the residential housing stock. An inferior housing stock (high HPLUM) may require, everything else constant, a greater number of housing units to serve a gtven population. The greater existence Iof inferior housing and the number of rooms in the typical houslng unit may also provide information on residential taste for local expenditure. HPLUM and HROOM are therefore included in the EXP regression An additional issue is the inclusion of population (POP) as an explanatory variable in equations 2 and 3. POP and HOMES exhibit a sirnple correlation coefficient of A city s population and the chosen proxy for its capital base essentially mea

11 AN EMPIRICAL TEST OF THE NEW VIEW I TABLE 1 CITIES IN EACH CROSS SECTION (GIVEN BY EFFECTIVE PROPERTY TAX RATE) City Little Rock, AR 2. Birmingham, AL 3. Mobile, AL 4. Montgomery, AL 5. Phoenix, AZ 6. Tucson, AZ 7. Berkeley, CA 8. Fresno, CA 9. Glendale, CA 10. Long Beach, CA 11. Los Angeles, CA 12. Oakland, CA 13. Pasadena, CA 14. Sacramento, CA 15. San Diego, CA 16. San Jose, CA 17. San Francisco, CA 18. Torrance, CA 19. Denver, co 20. Bridgeport, CT 21. Washington, DC 22. Jacksonville, FL 23. Miami, FL 24. St. Petersburg, FL 25. Tampa, FL 26. Honolulu, HI 27. Des Moines, IA 28. Chicago, IL 29. Wichita, KS 30. Louisville, KY 31. New Orleans, LA 32. Shreveport, LA 33. Baltimore, MD 34. Detroit, Ml 35. Minneapolis, MN 36. St. Paul, MN 37. Kansas City, MO 38. St. Louis, MO 39. Omaha, NE 40. Charlotte, NC 41. Jersey City, NJ 42. Newark, NJ 43. Albuquerque, NM 44. Buffalo, NY 45. New York, NY 46. Rochester, NY 47. Cleveland, OH 48. Columbus, OH 49. Dayton, OH 50. Toledo, OH 51. Oklahoma City, OK 52. Tulsa, OK 53. Portland, OR 54. Philadelphia, PA 55. Pittsburgh, PA 56. Memphis, TN 57. Nashville, TN 58. Salt Lake City, UT 59. Norfolk, VA 60. Richmond, VA 61. Seattle, WA 62. Milwaukee WI " Mean Standard deviation ?mputed value: crosssectional data not available for regression a ' a 0.563a a " " 0.086a 0.115" ' " "

12 sure the same thing In equation 2, POP was dropped as an explanatory variable because of the collinearity problem its inclusion would create with HOMES. In equation 3, POP IS not included as an explanatory variable of HOMES because of collinearity with lagged (HOMES) whose inclusion will be discussed. 6 Land (L) is measured in square miles (AREA). A city s cnme rate (CM) is calculated as the number of crimes per home. A city s level of income (Y) is measured by the city s median family income. Substituting the variables just discussed into the original system of equations (26) and dropping POP yields the following revised system : PIB, = PTB(HOMES,, DAPT,, EXP,, Y,, ST,4X,, ITAX,, OVTAX,, AREA,, CM,, OWN,, HPLUM,, HROOM,, MANUF,) HOMES, == HOMES(DAPT,, EXP,, Y,, ST,4X,, ITAX,, OVTAX,, AREA,, CM,, HPLIJM,) DAPT, == DAPT(PTB,, EIXP,, STAX,, ITAX,, OVTAX,, lgov,, SENR,, OWN,, MANUF,) m EXP, = EXP(DAPT,, Y,, STAX,, ITAX,, OVTAX,, IGOV,, CM,, SENR,, CHILD,, EDUC,, HPLUM,, HROOM,, MANUF,) Y, = Y(HOMES,, SENR,, CHILD,, EDUC,, MANUF,). Table 2 contains a description of all variables and a list of sources. Table 3 contalns descriptive statistics for all variables. There are a few econometric issues to consider before equations (7l 1) can be estimated. Along with the rightside variables specified previously, city or regional specific influences that do noit change over time (flxed effects) are also irnportant City property values, property bases, reliance on the property tax, and expenditure levels can all be influenced by timeinvariant politics, laws, institutions, historical factors, climate, location in country, etc. City income could also be influenced by compensating differentials, labor market peculiarities, and some of the same timleconsistent factors just mentioned. In a pooled regression with many crosssectional units and a few time series performed on stockdependent variables, sue h cityspecific effects could be crudely p:oxred for by regional dllmmies and climate variables Ibut never fully controlled for.27 As suggested by HoltzEakin (1986), a solution is to estimate the regressions using the first differences of each variable s observatlons.2e This was accomplished by restricting the 62 city clata set to cities in which observations were available for contiguous cross sections. Subtracting 1966 values from 1971 values, 1971 from 1976 values, and 1976 from 1981 values yielded a new poolecl data series of three cross sections consisting of 134 observations. A difference variable is delineated from the previous stock variables by a I) after the stock variable s name. The interpretation of the differenced regression coefficients is no different than if they were stock regression coefficients. A second econometric issue is that equation 8 represents a housing stock equation. A partialadjustment model of housing was used to account for the inertia in a city s housing stock.* A third econometric issue relates to Ihe twostage estimation process. To derive consistent estimators for the coefficient!, on the endogenous variables in

13 AN EMPIRICAL TEST OF THE NEW VIEW I TABLE 2 VARIABLE DESCRIPTION AND SOURCE Name Description Sourcea Endogenous: PTB HOMES DAPT EXP Y Exogenous: APT STAX ITAX OVTAX IGOV AREA CM OWN SENR CHILD EDUC HPLUM HROOM MANUF D8176, etc. Weighting: POP market value of all real property number of yearround housing units (effective real property tax rate APT ) in percent total city general expenditure/ HOMES median family income CENGOV CCDB* CENGOV CGF CCDB* and DCEN* city s average effective property tax rate in percent CENGOV dummy if city general or selective sales tax CGF dummy if city income tax CGF overlapping state, county, school taxes/ HOMES CENGOV, SGF (city s intergovernmental revenue/general revenue) in per CGF cent square miles (serious crimes known to police/ HOMES ) in percent housing units owner occupied in percent population greater than age 65 in percent population less than age 18 in percent population high school graduates in percent housing lacking adequate plumbing in percent median number of rooms in yearround housing manufacturing employment in percent dummy for cross section, etc. population %ENGOV = Census of Governments, 1966, 1971, 1976, and 1981; CCD8 = City and County Databook, 1968, 1978, and 1988; CGF = City Government Finances, 1966, 1971, 1976, and 1981; SGF = State Government Finances. 1966, 1971, 1976, and 1981; DCEN = U.S. Decennial Census (various volumes), 1960, 1970, and 1980; and UCR = F.B./. s Uniform Crime Report, 1966, 1971, 1976, and CCDB* UCR, CCDB* CCDB* CCDB* CCDB* CCDB* CCDB* DCEN* CCDB* DCEN* All variables measured in dollars have been deflated by the appropriate U.S. GNP deflator. A local CPI deflator was not used, because part of the variation in local consumer price; is.due to the housing component of the CPI. Deflating by CPI would rem&e much of the variation that the empirical work is attempting toexplain. An asterisk (*) indicatesthat the variable was riot available for the desired years of 1966, 1971, 1976, and 1981 and was calculated from 1960, 1970, and 1980 census values by interpolation and extrapolation. A D follows variable names to indicate the 5 year difference in value. An L follows to indicate the lagged value of the nondifferenced variable for the particular cross section. the second stage, the firststage instruments must each be uncorrelated with the secondstage error term. Candidates for the required instruments are all 13 exogenous difference variables and the initial values of all endogenous and exogenous variables. To test the requirement that the candidates for instruments are uncorrelated with the secondstage error term, a form of the Hausman (1978) test was used.30 To estimate the system, the three differenced cross sections were pooled together. The regressions were initially run without a constant and with a set of three dummies (D8176, D7671, and D7166). If a set of dummies was jointly significant, they remained in the regression. These dummies are intended to control for timespecific conditions, such as the average rate of property taxation in the country (APT) and macroeconomic effects, that would be common to all jurisdictions but not controlled for by dlfferencing.3 The final econometric issue is heteroskedasticity. In studies of this sort, residual variance is often related to some measure of relative size. If this is not corrected, calculated standard errors are biased and t 147

14 . TABLE 3 VARIABLE DESCRIPTIVE STATISTICS.. Coefficient of Value where Variablle _~ Mean Variation Maximum. Minimum DAPT is Maxa Endogenous: PTB 1.579E HOME!; I.74 DAPT absolute (DAPT) 0.57 I.06 EXP Y Exogenous: APT STAX ITAX OVTAX IGOV AREA I CM I.02 OWN 50.Q SENR 1 I.S CHILD E.DUC HPLUM HROOM MANUIF Weighting: 2.575Et I E E I 5 I.oo oo oo I.oo IO POP oo DAPT was a maximum in the city of Newark, NJ in The descriptive statistics are based on 209 observations from 1966, 1971, 1976, and tests of statistical significance are invalid. Using different forms of the Glesjer test, heteroskedasticity in relation to HOMES or POP was detected in all regressions and they were reestimated using the appropri.ate weight.32 The final results of tihe estimation of equations (71 1) are reczrded in Table 4.33 The <jet of dummies representing each differ Ienced cross section was jointly statistically significant in each regression except EXP. These dummies capture all crosssectional (effects not represented by other rightside lvariablles and hence include the effect of the difference in the average rate of national Iproperty taxation (APTD). It is notevdorthy that, In the IPTBD regression, the coefficients on the crosssectional dummies continually inlzreased frorn the D7166, to zhe D7671, to the D8176 cross section. The coeffjcients in the HOMESD regression increased from the D7671 to the D8176 cross section. Though1 there are other confounding effects, these are the patterns expected from the New View s profits tax effect since the average rate of property taxation continually declined over this period.34 In all regressions, except the PTBD and HO MESD regressions, all statistically significant coefficients displayed the signs predicted earlier.35 An unexpected finding in the PTBD regression was the sign on the HROOMD coefficient. The negative influence of a greater median number of rooms in housing may be due to the room number acting as a negative proxy for the age of a city s housing stock. As evidence, for all cities in the sample, the average value of HROOM declined from 5.4 in 148

15 AN EMPIRICAL TEST OF THE NEW VIEW I RightSide Variable PTBD HOMESD DAPTD EXPD YD STAXD ITAXD OVTAXD IGOVD AREAD CMD SENRD CHILDD EDUCD OWND HPLUMD HROOMD MANUFD (LAG) HOMESD TABLE 4 FIRSTDIFFERENCEDWEIGHTED TSLS REGRESSION RESULTS PTBD (HOMESLO. ) ( ) 3.243E+gb (1.625E+9) ( ) b ( ) 2.034E+9 (l,bobe+9) 2.723E+9 (2.754E+9) ( ) ( ) (27.245) ( ) (79.411) ( ) 1.46lE+8 (1.40lE+8) 5.180E+ga (2.051 E+9) 3.462E+8 (5.485E+8) D E+gb (1.6lOE+9) E+gC (0.715E+9) E+9 (0.492E +9) Dependent Variable (Weight) HOMESD DAPTD EXPD (POPD) [(I /POPL)O 51 [H~MESL] [(I,Pyd)pL)O 5] a ( ) 1.1 lzc (0.789) (0.245) b ( ) ( ) 4.02Ba (0.922) B90.43ga ( ) 0.422a (0.023) a ( ) Sb ( ) ( ) 5.235E12a (2.128E12) (0.49BE4) (0.165) 0.267b (0.118) 6.396E05 (5.259E05) 0.007b (0.003) 0.181a (0.066) (0.025) (0.009) (0.116) 0.126b (0.056) (0.082) ( ) 0.074b (0.040) ( ) ( ) 0.12Sb (0.063) a (4.258) (8.423) (74.242) (40.596) 29.28Sb (17.314) b (17.312) b ( ) (7.450) O.OOsb (0.003) (I ) (91.933y a (54.427) ' (22.749) a ( ) a ( ) Sa ( ) Adjusted f?* FStatistic 2.64ga a 33.58ga 7.124a Twotailed statistical significance: a99% or greater, b9098%, and 8089%; all regressions use 134 observations. 149

16 1960 to 4.7 In 198(1.36 An additional unexpected finding in the HOMESD regression is the significant positive influence of the effect of putting a local sales tax in place. This result may be due to the positive capitalization of the inital expectation that this action signals lower property tax increases 111 the future.37 Also, in the HOMESD regression, the coefficient on the number Iof crimes per household was surprisingly 3ositive. A feasible explanatron is that the (crime measure may proxy for other positive characteristics that attract new housing to a city. Other Interesting and statistrcally significant findings are that the greater the percentage of housrnig units with inferior plumbrng (HPLUMD) and the greater the median number of rooms in these housing units (HROOMD), the less local expenditure per housing unit. HPLUMD and HROOMD were Intended to measure restdential tastes, and it appears that the greater the propensity for residents to live rn inferior and greater roomed housing (which, as shown in the fw3d rlegression, is ltkely older and less valuable), the less local expenditure per house Iprovided them. Also, as the percentage of local workers employed in manufacturing increases (MANUFD) and the percentage with high school diplomas increases (EDUCD), the city s total expenditure per unit of capital decreases. Per unit of property tax base, commercial or retail outlets likely require greater infrastructure and police expenditure than manufacturing. A greater percentage of high school grads likely reduce a city s social service spending. Finajlly, MANUFD had an overall negative influence on the change in local median family rncome (YD). Cities whose ernployment was more concentrated in manufacturing lost family income during this period, ceteris paribus. Calculated at the mean for each variable and at the maximum observed value for DAPT, Table 5 lists, in the appropriate row and column element, the elasticities for all significant coefficrents.38 The elasticities from the DAPTD regression should be of particular interest to policymakers, because they indicate local characteristics that have caused a large U.S. city to rely cm a higher than average rate of property taxation. Evaluated at the mean, a 1 percent increase in the value of the local property tax base causes only a 0.15 percent decrease in the difference between the city s effective rate of property taxation and the nation s average rate. A similar increase in local expenditure per house causes a larger 0.59 percent Increase in the average city s reliance on property taxes. The response, evaluated at the mean, of a 1 percent increase in the percentage of senior citizens in a city IS a very elastic 3.67 percent decrease in DAPT. If the average city adopted a local income tax or experienced a 1 percent increase in the percentage of local revenue coming from intergovernmental sources, its reliance on the property tax would respectively decline by and 0.39 percent. In the city with the greatest reliance on the property tax, the response in the change in property tax reliance is much smaller in absolute terms than the responses evaluated at the mean. Concerning the proposed null hypothesis, the evidence required to reject the statement that the New View is entirely without merit exists. The regression using PTBD as the dependent variable Indicates that a 1 percent increase in the difference in the rate of property taxation above the national mean, ceteris paribus, would cause a 0.13 percent decrease in the average city s perunit market value of real property. The direction of this finding is the result predicted by the excise tax effect of the New View of property taxation. Under a pure Benefit View of property taxation, the rate of property taxation should not influence PTB. As the New View has been described in Figure 2, a 1 percent inc:rease in a city s DAPT, holding property constant, should 150

17 AN EMPIRICAL TEST OF THE NEW VIEW I RightSide Variables PTB HOMES DAPT EXP Y STAX ITAX OVTAX IGOV AREA CM SENR CHILD EDUC OWN HPLUM HROOM MANUF PTB TABLE S ELASTICITIES OF STATISTICALLY SIGNIFICANT VARIABLE (2.85) 0.13 (3.39) 0.01 (0.18) 0.01 (0.03) ) 0.04(0.07) 0.05(0.11) ) ) Dependent Variables HOMES (short run)b DAPT EXP Y 0.02 (0.04) 0.15 (0.01) 0.59 (0.16) 0.47(0.06) 0.39(0.06) 0.94 (0.40) ) 0.24 (0.13) 0.05 (0.04) 3.67 (0.34) 0.33 (0.28) ) (1.38) (0.18) 0.07 (0.04) 1.65 (0.75) 0.32 (0.22) 0.03 (0.05) Initial values in the cells of the table represent the elasticity calculated at the mean (for DAPT, these elasticities are calculated at the mean of the absolute value). Values in parenthesis represent the elasticity calculated at the maximum observed value of DAPT. For ITAX and STAX, the elasticity is represented as the percentage change in dependent variable given the implementation of the local tax. % calculate the corresponding longrun elasticities, divide the given value by be fully capitalized into a 1 percent decrease in PTB. A positive excise tax effect shifts the city s property demand curve down a perfectly inelastic supply curve and drives the city s property value down by the full amount of the effect. There are likely two related reasons for the elasticity calculated here being less than one. The first is the use of a proxy to control for the shortrun perfectly inelastic supply of capital. HOMES, even including the various control measures, is an imperfect measure of firm and even residential capital. This creates an elasticity to the supply curve that can cause the calculated DAPT elasticity of PTB to be less than one. A second reason is the use of proxy variables to control for local property demand. If property demand is not held constant after an increase in DAPT, the regression result will pick up the effect of mobile consumers that could leave the city after the increase in property taxes. If this occurs, there is a mixture of backward shifting of the property tax increase to land and fixed capital (captured in lower property values) and forward shifting to imperfectly mobile consumers (not captured in lower property values). Allowing for full adjustment of property supply and demand, Mieszkowskr s (1972) original conjecture was that approximately 25 percent of the excise tax effect would be borne by immobile factors. The partial capitalization result of 13 percent is consistent with the imperfect measure of property supply and property demand and Mieszkowski s conjecture. The excise tax effect of the New View also predicts that a local property tax rate above the national average should, in the long run, reduce the amount of mobile capital in the city. As given by the significant negative effect of DAPT on HOMES, there is evidence of this occurring in the chosen sample of cities. After 5 years, the percentage decline in HOMES, after a 1 percent increase in DAPT, was only a very inelastic Allowing for full adjustment, the longrun elasticity was still only 0.02 (0.01/0.58). The very small DAPT elasticities of HOMES connotes that, If cap 151

18 ltal mobility is the mechanism that equalizes differences in property rental rates across cities, then these differences will persist3 Although the excise effect of property taxation does drive capital (as measured by number of residential homes) out of a city, there is no empirical evidence here to indicate that movements in housing capital are very responsive to differences in local property tax reliance. This result calls into doubt the primary assumption of the Traditional View of property taxation that, at a nationally determined rental rate (I;v), there is a perfectly elastic supply of capital to all cities. This could only occur if capital were perfectly mobile between all cities in the short run. The implication of capital immobility in regard to the incidence of the property tax is discussed in the conclusion. The pertinent finding to consider is the statistically significant negative effect of DAPT on PTB and HOMES. These negative effects vvere robust across all cross sections and support the rejection of the proposed null hlypothesis thatt the New View is entirely invalid. The excise tax effect s negative capitalization result is similar to previous Oates type results where property tax rates, holding all else constant, lower aggregate local property values. The important difference here 1 5 that the New View s predicted excise and Iprofits tax effects exist for both the perunit value of property and the number of units of property In large cities drawn from a national sample. SIMULATIONS REGARDING AN IN CREASE IN THE PROPERTY TAX AND REVENUE ALTERNATIVES TO IT Using the regrlession results, rt IS possible to examine the effect that a purely exogenlzus 1 percent increase in the difference between the average city s property tax rate and the national average rate would have on other endogenous variables in the simultaneous system. An increase in this property tax dlfferentual can possibly have direct and indirect effects. The direct effect occurs if DAPT directly influences an endogenous variable. The indirect effect occurs if DAPT effects one of the four remaining endogenous variables that, in turn, influences the endogenous variable under question. To conduct the proposed simulations, only the statistically significant variables vvere considered to exert any influence. Reading across the DAPT row in Table 5, evaluated at the mean, a 1 percent increase in DAPT causes a 0.13 percent decrease in the typical city s property value and a percent decrease in the shortrun (5 year) change in the number of homes. This exogenous change would dtrectly reduce PTB by 0.13 percent. Through an induced decrease in the numbler of homes, it would also indirectly decrease PTB by a (1.42 multiplied by 0.01) percentagcl in the short run and (1.42 multlplied by 0.02) percentage in the long run. The total effect would be a percent decrease in the value of the city s property tax base in the short run and a percent decrease in the long run. The effect on the city with the greatest reliance on property taxes would be a more elastic shortrun decline of 3.90 percent in unit property value and 0.18 percent in HOMES. These shortrun effects, along with others, are recorded in Table 6. As the Benefit View of property taxation requires, even after accounting for the induced local expenditure increase that could follow an increase in local property taxes (but does not in this data set), the perunit value of local property and its amount declines in both the short and long runs following the property tax Increase. This again indicates that, in part, the property tax does act as a capital tax. The depres SIVE? effect of the New View s excuse tax effect on capital is not much larger in the long run than in the short run. 1 ii2

19 AN EMPIRICAL TEST OF THE NEW VIEW I DAPT STAX ITAX OVTAX IGOV PTB TABLE 6 RESULTS OF POLICYRELEVANT HOMES 0.14 (3.90) 0.01 (0.18) 0.06 (0.20) 0.04 (0.07) 0.06 (0.20) (0.01) 0.07 (0.31) 0.05 (0.11) 0.05 (0.20) 0.01 (0.02) SIMULATIONS DAPT 1.02 (1.03) 0.00 (0.00) 0.47 (0.06) 0.12 (0.02) 0.24 (0.04) EXP 0.00 (0.00) 0.00 (0.00) 0.00 (0.00) 0.21 (0.12) 0.24 (0.13) The ceils in the table represent the percentage change in each column s variable after a 5 year period if, during that same period, there was an exogenous 1 percent increase in the given row variable (DAPT, OVTAX, or IGOV; or the implementation of a STAX or ITAX). Initial values are calculated at the mean. Values in parentheses are calculated at the maximum value of DAPT. Perhaps because of an implicit understanding of the destructive effects of a relative overreliance on property taxation, local policymakers have increasingly looked for revenue alternatives. As recorded in Table 1, both the mean and standard deviation of effective property taxation in this sample of large U.S. cities declined almost continually between 1966 and A largely untapped alternative to local property taxes is the use of local income taxes. In the chosen set of cities, 10 out of 62 (16 percent) used a local income tax in This figure only grew to 16 out of 62 (26 percent) cities in Of interest to policymakers looking for local revenue alternatives would be a full simulation of the total effect on the average large U.S. city that decided to adopt a local income tax. As recorded in Table 6, adopting a local income tax would, (1) increase real property values by 0.06 percent, (2) increase the number of homes by only percent, (3) decrease the differential between the city s rate of property taxation and the national average rate by 0.47 percent, and (4) have no measurable effect on a city s expenditure per house. Another local revenue alternative is sales taxation. Large cities in the United States have already used this alternative to a much larger degree. In 1966, 55 out of the 62 (89 percent) large U.S. cities in the sample had either a personal or selective sales tax. This figure grew to 59 out of 62 (95 percent) of the cities in the 1981 sam ple. A simulated adoption of local sales taxation would increase the value of a city s property tax base by 0.06 percent, which is the same as the city adopting a local income tax. The same adoption of a local sales tax would increase the number of homes by 0.04 percent in the short run, which is about eight times the magnitude of an adoption of local income tax. In this sample of large U.S. cities, the adoption of a local sales tax had no effect on decreasing local reliance on the property tax. Another option available to higher governments wishing to reduce local property tax reliance would be to increase intergovernmental revenue shared with cities. Over the period of observation, this was occurring. In 1966, the median value of the percentage of local revenue that came from higher governments was 10 percent. By 1981, this figure had risen to 16 percent. The effects of Increased revenue sharing to the average city can be approximated by simulating the result of an exogenous 1 percent increase in the percentage of the average city s budget coming from intergovernmental grants (IGOV). The simulation process is similar to that discussed earlier, and the results are again in Table 6. As expected, an infusion of outside money would have a positive effect on the perunit value of property, homes, and expenditure per home in the sample of U.S. cities. Evaluated at the mean, a 1 percent increase in IGOV would also have the desired effect of reducing DAPT by 0.24 percent. 153

20 A 1 percent increase in overlapping taxes (OVTAX), holding other exogenous variables constant, decreases local reliance on the property tax and reduces local expenditure per house, because services once provlded by the community are now being provided by outside governments. Local policymakers jnould note that the overall effect of this change to the average large IJ.S. city is a 0.07 percent decline in unit property value and a 0.05 decline in homes. City officials not only need to be concerned about their own rate of local taxation, but also the rates imposed by overlapping governments The negative effects of greater fiscal activity outside the city are even greater in the most property tax reliant city. Local plolicymakers woulcl generally look upon the simulated rlesultr of reducing the reliance on property taxes favorably and hence these results should be of interest to them. As demonstrated, 1r1 order to benefit property, this reduction needs to come from an exogenous source (statewtde property tax limitation holding other variables constant), through an increase In revenue sharing, or through the implementation of a less burdensome? sales or income tax. In the current political climate and due to the fact that most large U.S cities have local sales taxes of one form or another, the option of adopting a local Income tax is probably the most realistic alternative. As demonstrated by the responses in Table 6, it 1s also one of the most effective. Cmclusions Clonsidering thle evidence just given, a conclulsion to reject the null hypothesis that the New View of prol:)erty taxation is entirely invalid is appropriate. The reported regression resulis and simulations provide evidence that local property taxes affect local property values in the manner predicted by the New View and are not possible under a pure Benefit View of property taxation. Due to the increasing magnitude of coefficiems on the crosssectional dummy variables In the property tax base and homes regressions, there is the necessary, but probably not entirely sufficient, evidence of!he New View s profits tax effect. There is much stronger evidence in support of the New View s excise tax effect. Ceteris paribus, a greater than average reliance on property taxes reduces property value and drives out property. The effect on property value is much larger than both the shortand longrun effects on property mobility. As shown using a full simulation, these excise tax effects occur even after allowing for the benefits from the increased expenditure that could follow a property tax increase. Note the effects of a greater than average reliance on the property tax. As shown here, such an overreliance drives down local perunrt property values and slightly decreases the amount of property in the city. Since there is evidence in support of the New View s tax effects, at least a portion of the property tax falls on all owners of property throughout the United States. The property tax is, in part, a capital tax, or a progressive form of taxation. Note also the finding that, based only on local property tax differentials, housing capital displays little mobility between large U.S. cities. The excise tax effect on local property rental rates (or local property values) is likely to persist, because without deterioration, mobile capital is the instrument necersary to equalize property rental rates across cities. Owners of property in higher that1 average property tax cities will earn lower property rental rates than owners of the same property in lower than average property tax cities. If, as Mieszkowski and Zodrow assume, property ownership is not restricted to city of residence, this finding has no Importance to the progressivity or regressivty of property taxation. But, if like homeowners, all property owners reside in the city in which they own property, a high rate of local property taxation

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