Strategic Interaction Among Overlapping Local Jurisdictions
25 Pages Posted: 7 Sep 2014 Last revised: 9 Sep 2014
Date Written: September 5, 2014
Fiscal policies of state and local governments are determined in an environment of strategic interaction. The public economics literature has classified several features of these interactions that describe how governments' taxation and expenditure policies are interrelated. One form of strategic interaction that has received little attention occurs between different types of local governments that have overlapping boundaries. These entities share either part or all of their tax bases with each other and therefore are jointly constrained by voters' willingness to be taxed on that base. This paper explores the strategic interactions between counties and school districts by testing for reactions to how the property tax is used in overlapping jurisdictions. I implement GMM Instrumental Variables model that utilizes county non-salary benefits and general obligation debt expenditures to identify the county property tax levy, the impact of county property taxes on school district property levies is then estimated in a second stage regression. The results reveal a positive cross-tier tax elasticity indicating a yardstick type of strategic interaction among overlapping local jurisdictions.
Keywords: property tax, tax competition, local government
JEL Classification: H2, H7
Suggested Citation: Suggested Citation