Does fiscal decentralization constrain Leviathan? New evidence from local property tax competition

Abstract

This paper reexamines whether fiscal decentralization constrains Leviathan government. Using panel data for Pennsylvania, we compare actual property tax rates to the Leviathan revenue-maximizing rates for municipalities, school districts, and counties. Using spatial econometric methods we also estimate the degree of spatial dependence at the three levels of local government. We find that fiscal decentralization results in stronger intergovernmental competition and lower tax rates. We also find evidence of collusion among school districts that exhibit high interdependence but also high tax rates. This calls into question the current literature’s blind use of spatial dependence as a measure of intergovernmental competition.