Are Community-Nuisance Fiscal Zoning Arrangements Undermined by State Property Tax Reforms? Evidence from Nuclear Power Plants and School Finance Equalization

Abstract

The conventional view of fiscal zoning is that communities only make land use accommodations to Nuisance Entities who generate enough fiscal benefits to compensate for their other undesirable traits. By representing a disproportionate burden of the property tax base, this finance-for-location quid pro quo is often thought to be transmitted from the nuisance to the community in the form of reducing the property tax burden for the enfranchised residents. State tax reforms which redistribute property tax revenues have been accused by critics of violating these implicit arrangements between communities and nuisance entities. This paper tests this critique by examining communities with nuclear power plants sited before the school finance equalization reforms of the 1970's and 80's. A hedonic regression reveals that housing prices in communities with nuclear power plants were 11 percent lower than their immediate neighbors. Furthermore, it is discovered that communities experience a compensating increase in housing prices after a reform when their neighbor has a nuclear power plant. This is consistent with a model where resident home buyers bid on properties in a way that capitalizes interjurisdictional differences, implying that the reform had a disparate impact on the communities with the nuclear plants. Finally, the results do not seem to be conditional on whether the reforms were judicially or legislatively initiated.