Abstract
This paper develops new measures of environmental costs and local revenue capacity as the basis for a new municipal aid formula in Massachusetts. On the cost side, unlike previous studies, we quantify the effects of uncontrollable-cost-related characteristics on local non-school spending. On the capacity side, we account for the constraints of a tax limitation, for the first time in the literature, by estimating an exogenous measure of the constraints as a function of residents' incomes. The estimates of costs and capacity indicate substantial inter-local fiscal disparities in Massachusetts. Our approach is potentially applicable to other states.
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