Do State‐Funded Property Tax Exemptions Increase Local Government Inefficiency? An Analysis of New York State's STAR Program

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This study tests the effects of a growing form of indirect state aid—state‐supported property tax exemptions—on local government efficiency. We hypothesize that larger exemptions, by lowering the effective tax price paid by local homeowners and thus their incentive to monitor efficiency, will reduce local government efficiency. We test this hypothesis by examining the introduction of New York State's large state‐subsidized property tax exemption program, which began in 1999. We find evidence that, all else constant, the exemptions have reduced efficiency in districts with larger exemptions, but the effects appear to diminish as taxpayers become accustomed to the exemptions.