Abstract
In 2001 the state of Minnesota reduced the weights assigned to non-residential property in local property tax bases, which increased residents' price of raising property tax revenue and affords the opportunity to identify the tax price elasticity of local tax revenues and expenditures. Results suggest that a one percent increase in residents' tax prices is associated with a one percent decrease in per-resident property tax revenues as well as a substantial reduction in capital expenditures. The unit price elasticity of property tax revenues suggests that popular tax relief programs that reduce residents' tax prices – homestead exemptions – do not reduce homeowners' tax payments.
Highlights
The focus of this paper is the estimation of the tax price elasticity of property tax revenues
The tax price elasticity estimates presented in this paper provide valuable insight into the impact of all of these programs on local governments and local taxpayers
Because the instrument explains almost all of the variation in homestead tax share during the policy change years, comparing regression results from pre-reform years to results from reform years is the only way to see the potential bias produced by endogenous tax prices
Summary
When property taxes finance cities’ marginal changes in expenditure, a resident’s tax price reflects the cost of raising additional per-resident property tax revenues and the cost of additional public expenditures. It can be shown, via an accounting identity, that the five components of a resident i’s tax price are the marginal cost of public service quality, the homestead ratio, the homestead tax share, the matching rate, and federal tax deductibility. The share of total tax base derived from homestead property in city j is the city’s homestead tax share, HSjt. The component of tax price, Mjt = 1/(1 + ψjt), is the state-financed share of locally raised revenues. Even if the local government raised the same total amount of property tax revenue, businesses pay more in taxes
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