Local Property and State Income Taxes: The Role of Interjurisdictional Competition and Collusion

JOURNAL OF POLITICAL ECONOMY, Vol. 105, No. 2, April 1997

Posted: 6 May 1997

See all articles by Thomas J. Nechyba

Thomas J. Nechyba

Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Abstract

This paper addresses two long-standing positive questions in public finance: 1) Why is the property tax, despite widespread popular complaints against its fairness, the almost exclusive tax instrument used by local governments; and 2) why do we consistently observe higher levels of governments (states) undermining local property tax systems through income tax, funded grants and state-imposed caps on local property tax rates? A new intuitive argument to explain question 1 is presented and tested in simulations using a computable general equilibrium model with parameters set to be consistent with New Jersey data. Both the intuitive argument and the simulation results indicate that setting local income tax rates to zero is a dominant strategy for community planners. When faced with popular sentiment against the property tax, community planners can collude and introduce local income taxes simultaneously to prevent adverse general equilibrium migration and price changes. Since zero income tax rates are dominant strategies, however, such an agreement is enforceable only if an outsider such as the state government steps in. The institution of state grants funded through a state income tax can play such an enforcement role.

JEL Classification: D58, H71, H73, H77

Suggested Citation

Nechyba, Thomas J., Local Property and State Income Taxes: The Role of Interjurisdictional Competition and Collusion. JOURNAL OF POLITICAL ECONOMY, Vol. 105, No. 2, April 1997, Available at SSRN: https://ssrn.com/abstract=4876

Thomas J. Nechyba (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1841 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
630
PlumX Metrics