Municipal Corporations, Homeowners, and the Benefit View of the Property Tax

Abstract

In combination with municipal zoning and the "vote with your feet" discipline proposed by Charles Tiebout, the local property tax is both a benefit tax and an efficient tax, at least when compared to statewide or federal taxes used to fund the same services. To pursue this claim, I modify the Tiebout model by adding to it something Tiebout himself wanted to avoid: politics. The politics I add is not that of the political science department, but of the finance department. In my view, homeowners are the major stockholders - the risk-bearing, residual claimants - of modern municipal corporations. As scores of capitalization studies show, the good and bad things that local governments do affect the value of homeowners' largest asset. Because their risks cannot be diversified like those of stockholders of business corporations, homeowners are especially watchful of municipal affairs. They want local officials - their board of directors - to choose the mix of spending, taxes, and land-use regulations that maximizes the value of their homes. This choice has the benign effect of making the local property tax into a fee for service. Voters will accept an increase in this fee if the value of the service redounds to their net benefit. Even homeowners without children will be interested in efficient funding for local public schools, since prospective buyers have school-age children. The declining quality of public schools in states that have centralized their financing and attenuated the local tax and spending connection is consistent with this view.

JEL Classification: H7, I22, R5