59 Pages Posted: 9 Oct 2006
This paper explores the use of Mello-Roos taxes in California. These property tax-like taxes, originally a means of giving local governments an alternative way to raise revenue in the aftermath of Proposition 13, are also in use in four other states (Arizona, Hawaii, Illinois, and New Mexico) and on the agenda of at least one more (Washington). In practice, Mello-Roos taxes are primarily a means of providing private developers, usually of suburban housing, with tax-free financing for key infrastructure. Related mechanisms (namely benefit assessments) are used in the same way all over the country (e.g., Florida, New Jersey, Texas). Despite the prevalence of Mello-Roos taxes (covering up to 90% of new development in California) and their kin, their magnitude (in 2004 alone, these taxes secured $1.7 billion in bonds issued in California), and their broad implications for the use of public funds and the nature of local democracy, there has not been a single extended study of these taxes.
This paper begins to fill that lacuna by describing how these taxes were actually used in California in 2003; this analysis is embedded in a larger normative discussion of local government law, considering these taxes from the two dominant theoretical perspectives. These taxes can be viewed as a benign and efficient way to provide services citizens want (i.e., as part of a Tiebout dynamic) or as another way in which local democracy as the exercise of self-government for the common good is being undermined. Both perspectives are plausible in the abstract; the Tiebout hypothesis can be tested empirically by looking to whether Mello-Roos taxes are capitalized into home price by purchasers. It has already been recognized in the literature that Mello-Roos taxes provide an especially good candidate for full capitalization, though the analysis actually done has been limited. The original results of this paper strongly suggest that Mello-Roos taxes are not nearly fully capitalized, thereby undermining the Tiebout narrative and indicating that these taxes undermine local democratic ideals without any concomitant efficiency gains.
Keywords: capitalization, property tax, Proposition 13, Mello-Roos tax, tax-exempt financing, suburban development
JEL Classification: H70, H71, H73, H74
Suggested Citation: Suggested Citation
Shanske, Darien, Public Tax Dollars for Private Suburban Development: A First Report on a National Phenomenon. Virginia Tax Review, Winter 2007. Available at SSRN: https://ssrn.com/abstract=925573