Local Tax and Expenditure Capitalization: Integrating Evidence From the Market and Political Processes

Abstract

Numerous empirical studies have attempted to verify the Tiebout hypothesis through analysis of the capitalization of differential tax rate and expenditure levels into property values at the local level. A major weakness in this literature is the neglect of voting, the other principal method of preference revelation for local public services. This article seeks to integrate the analysis of the outcomes of voting and mobility decisions by linking a model of residential property value determination and a public choice model of local public expenditure determination. Capitalization of fiscal differentials is shown to affect voting decisions through the tax price of local services. The interrelationship creates a justification for simultaneous equations estimation of both models. An illustrative empirical analysis is presented in which residential property value and local public expenditure models are estimated with ordinary and two-stage least square techniques. Substantial differences are found between the two techniques supporting the hypothesis that significant interrelationships exist between mobility and voting outcomes in metropolitan areas.