Property Taxation as Compensation for Local Externalities: Evidence from Large Plants

Abstract

The external costs and benefits of large capital-intensive projects often occur on dramatically different spatial scales. When local jurisdictions have control over land use, this spatial mismatch can prevent socially beneficial projects from moving forward or allow socially harmful projects to be built. In this paper, we explore how local control of property taxation, one important localized benefit of these projects, can impact land use decisions in the context of large plants. We first demonstrate that property tax payments from plant openings are both economically large and valued by local residents as measured through changes in home prices. We next show that limiting local jurisdictions’ access to property taxation affects the likelihood that it will contain large plants by using a series of school finance reforms as plausibly exogenous shocks. Following these reforms, we observe significant declines in large manufacturing establishments and local manufacturing employment per capita both in absolute and relative terms. These results suggest that increased property tax revenues are an important local benefit of large externality-producing projects and that policies which affect local property taxation can have major unintended consequences for non-residential land use.

Keywords: power plants; property tax; fiscal decentralization; school finance equalization; housing values; Coase Theorem

JEL Classification: H20; Q50; R30