State Institutions and City Property Taxes: Revisiting the Effects of the Tax Revolt
McCabe, Barbara Coyle, Journal of Public Budgeting, Accounting & Financial Management
ABSTRACT. Cities' reliance on property taxes has declined since the 1970s. This shift has been attributed to state rules enacted in the wake of the tax revolt and intended to curb property taxes. The extent to which state limits on property taxes have affected their cities' revenues is unclear. This study examines competing explanations for the change in city property tax reliance among states. Pooled cross-sectional time series analysis is used to assess how much state limits or other factors account for changes in property tax reliance over time. The results of this analysis challenge state limitations' long-term effects.
The tax revolt began twenty years ago when California's Proposition 13 set off a wave of tax and expenditure limitation measures across all levels of government (Sears and Citrin, 1982). Since then, half of the states have adopted additional tax and expenditure limits (TELs) that constrain local governments' ability to raise revenue from their own sources, particularly from property taxes. Many states adopted more than one kind of limit (Mullins and Lox, 1995). These policies demonstrate an underlying state interest in how local governments raise revenues from their own sources, but the overall effectiveness of these restrictions is unclear.
The new state restrictions on local property taxes were expected to have long-term effects (Lowery, 1983; Eribes and Hall, 1981), but most studies were conducted when experience with the tax revolt was fresh (Lowery and Sigelman, 1981). The question of the long-term effects that state-imposed local TELs have had on local governments' own-source revenues has yet to be fully answered (Mullins and Joyce, 1996 and Joyce and Mullins, 1991 for exceptions.) Tax revolt era restrictions have been cited as one reason for a secular decline in property tax reliance among state and local governments (Bahl, Sjoquist and Williams, 1990). How much of the declining reliance on property taxes can be attributed to state property tax limitations remains uncertain.
This analysis addresses that question by drawing two competing explanations from the literature, and examining how changes in state property tax restrictions, along with other factors, have affected property tax reliance among states' cities over time.
Early studies of the tax revolt often tried to explain why the tax revolt had occurred, and concentrated on public opinion regarding the passage of tax limits in a single state (Ladd and Wilson, 1982; Sears and Citrin,1982). General explanations for the tax revolt proved elusive, but popular support was widespread. Both a CBS News/New York Times poll and the University of Michigan Social Research Center (SRC) pre-- election survey showed that a majority of their respondents would support a measure like Proposition 13 in their states (Hansen, 1990; "Opinion Roundup," 1978). Individual support for these restrictions crossed socioeconomic lines, as the rich and the poor, the homeowner and the renter alike tended to favor tax limitations (Dye, 1990; Hansen, 1983; Lowery and Sigelman, 1981).
The reasons for this broad support are subject to controversy that is grounded in part on differing opinions about what these tax restrictions were meant to accomplish. Some contend that these TELs were designed to reduce the overall size of local government, combating the prevailing trend of government growth. From this perspective, the pressures leading to government growth were seen as being so imbedded in the political process that only external measures, such as state-level restrictions, could counter them (Brennan and Buchanan, 1980). Others suggest that TELs had the more limited role of reducing local property taxes (Petersen and Claxton, 1979; Joyce and Mullins, 1991; O'Sullivan, Sexton and Sheffrin, 1995). The notion that the tax revolt was directed at the property tax is bolstered by the fact that most TELs states impose on their local governments are directed at the tax that, until the tax revolt, had been the mainstay of local revenue sources (Mullins and Cox, 1995). …