The Homevoter Hypothesis: How Home Values Influence Local Government Taxation, School Finance, and Land-Use Policies

Abstract

The successes and failures of local government are reflected in the value of homes in the jurisdiction. Good schools and attractive public goods raise the value of homes in a locality, and unpleasant environments and high property taxes lower those same values. Home values are the report cards for local government, and bad marks hurt the owners of those homes. Because homeowners, unlike corporate stockholders, cannot diversify their largest asset - their home - they become active in the governance of municipal corporations. They "vote their homes" in selecting public officials or in plebiscites.

The Homevoter Hypothesis works out the implications of this asset-market view of local government. It explains:

- Why local control of land use is so important to most American voters: It prevents newcomers from "free riding" on local public goods.

- Why the property tax is primarily a local tax: It connects the benefits of local (but not state or national) expenditures to property values. - Why rent control is rare in the United States: It shifts the burden of taxation to homeowners. - Why Californians rationally voted for Proposition 13, the 1978 property tax revolt: The Serrano decision of 1976 eliminated the connection between local property taxes and school quality. - Why displacement of local taxation by state funds reduces school quality: Capitalization of school quality at the local (but not at the state) level induces all homeowners, with and without children, to support cost-effective school spending. - Why localities are unlikely to "race to the bottom" on environmental issues: Degradation of local environments reduces home values. - Why local zoning, not the land market, causes suburban sprawl: Homevoters discourage zoning for higher densities that threatens their home values. - Why American metropolitan areas remain so politically fragmented: Homevoters know that consolidated metropolitan government will be dominated by business interest groups, not homeowners.

Keywords: homeowners, property tax, property value, local government, school finance, race to the bottom, corporate governance, real estate, capitalization, Tiebout model, median voter

JEL Classification: H7, R5, G3