Local Revenue Hills: A General Equilibrium Specification with Evidence from Four U.S. Cities

Abstract

We provide estimates of the impact and long-run elasticities of tax base with respect to tax rates for four large U.S. cities: Houston (property taxation), Minneapolis (property taxation), New York City (property, general sales, and income taxation), and Philadelphia (property, gross receipts, and wage taxation). Results suggest that all four of our cities are near the peaks of their longer-run revenue hills. Equilibrium effects are observed within three to four fiscal years after the initial increase in local tax rates. A significant negative impact (current period) effect of a balanced budget increase in city property tax rates on city property base is interpreted as a capitalization effect and suggests that marginal increases in city spending do not provide positive net benefits to property owners. Estimates of the effects of taxes on city employment levels for New York City and Philadelphia the two cities for which employment series are available show the local income and wage tax rates have significant negative effects on city employment levels.