Local Government Tax and Land Use Policies in the United States: Understanding the Links

By Helen F. Ladd; Lincoln Institute of Land Policy | Go to book overview
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tax capitalization, although the point elasticity of -0.82 seems unreasonably large in that context. Increasing property tax rates may also be serving as a proxy for fiscal and economic stress within the community.


The popularly held position that business development provides fiscal benefits to host communities is supported by the experience of the Chicago suburbs during the 1980s. Tax burdens, particularly when measured relative to income, increased relatively more slowly in those communities with rapid employment growth during the period. By itself, such an association is not proof of the proposition because low tax growth can also be expected to give rise to greater business development. Further complicating the picture is the expectation that, as the business share of the property tax base increases, expenditures for both business and household government services will increase. These in turn will put upward pressure on property tax rates. Thus the relationship between property tax rates and business development may be quite complex. However, when examined within the context of a general equilibrium model which allows for all of these nuances, the data continue to suggest that increased business development will lead to property tax relief. The data are also consistent with the hypothesis that population growth increases a community's tax burden. These two findings, together with evidence that business development in one community leads to population increases in other communities, point to a negative fiscal externality in the development process. This linkage between communities keeps open the possibility that, as a whole, local governments suffer fiscal losses from suburban job growth. The present model is inadequate for assessing this possibility. Perhaps the parameters developed here could be embedded into a computational model which takes into account actual geographic patterns. Altematively, a more aggregative framework might afford important insights into the issue. Whatever approach is taken, it is clear that host communities have fiscal incentives to engage in competition for job growth. This does not auger well for the central city.

Fiscal benefit is defined from the perspective of a typical household in the home community and implies an enhanced ability of such a household to consume more publicly provided goods and/or private goods and services. A fiscal benefit can arise from an increase in the community's taxable resources or, on the expenditure side, from a reduced need for public services. For example, a new business development typically adds to a


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Local Government Tax and Land Use Policies in the United States: Understanding the Links


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