The Incentive Effects of Property Taxes on Local Governments

25 Pages Posted: 19 Jun 2000 Last revised: 19 Aug 2010

See all articles by Edward L. Glaeser

Edward L. Glaeser

Harvard University - Department of Economics; Brookings Institution; National Bureau of Economic Research (NBER)

Date Written: January 1995

Abstract

This paper applies the ideas of Brennan and Buchanan (1977, 1978, 1980) to local property taxes. When local governments maximize their revenues, property taxes provide incentives for adequate amenity provision. Local amenity provision determines property values which then determine local tax revenues. As long as the demand for housing is inelastic, property-taxes will provide stronger incentives for local governments than lump-sum taxes. As current property values reflect expectations about future amenity levels, property taxes create incentives for even the most myopic government to invest for the future. Local property taxes can also act to limit the incentives of localities to tax; there are cases where higher levels of local property taxes lead to lower overall tax burdens. These ideas are applied to the tax reform in the late 1970s; one reason that tax reform may have been so successful is that in a period where land prices are driven by many forces other than government amenities, property taxes lose their value as incentive devices.

Suggested Citation

Glaeser, Edward L., The Incentive Effects of Property Taxes on Local Governments (January 1995). NBER Working Paper No. w4987. Available at SSRN: https://ssrn.com/abstract=226585

Edward L. Glaeser (Contact Author)

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