Regional Tax-Base Sharing: An Analysis and Simulation of Alternative Approaches

Abstract

The Minnesota Fiscal Disparities Act, passed by the state legislature in 1973, established the nation's first program for the sharing of property tax bases among independent jurisdictions in a metropolitan area. Under the Minnesota system, localities within the Twin Cities region contribute a portion of the local growth in commercial and industrial tax base to a metropolitan pool, which is then redistributed in inverse proportion to local per capita assessed valuation of all property. This plan has served as a model for legislation proposed in several other states, including Maryland, Michigan, Virginia, and California, but no other state has as yet enacted a plan (see Simms 1977; and Lyall 1975). The Minnesota legislature did not, of course, originate the idea that fiscal disparities among local units of government should be reduced by redistributing effective local tax bases. This idea has been a part of the economics literature on fiscal federalism at least since 1950 (see, for example, Buchanan 1950 and 1952; Musgrave 1961; Oates 1972). The prescription has generally consisted of a system of equalizing grants from higher to lower levels of government. The close similarities between base sharing and state equalizing aids have not been widely recognized. To facilitate a comparison of these approaches, we will show that the Minnesota base sharing program can be expressed as an equalizing grant formula. This permits an analysis of differences and similarities in program structure and leads to the development of a model base sharing formula designed to deal with some of the major deficiencies in the Minnesota plan. The effects of alternative formulas are illustrated by means of simulations performed for the Milwaukee metropolitan area. While a number of troublesome conceptual and empirical issues that plague the design of any base sharing or grant program remain unresolved, this analysis highlights certain program reforms that are conceptually sound and at the same time within the realm of political feasibility. We will also argue for a broadening in focus from the metropolitan to the state level. The many objectives of tax-base sharing which have been cited by proponents (see Lyall 1975:92; Fischel 1976; Reschovsky 1980), can be reduced to two: (1) enhancing equity among communities by equalizing the tax burden required to fi ance a given level of services, and (2) promoting greater efficiency in the location of economic activity. By reducing the incentives for communities to compete for fiscal advantage, it should be easier to convince localities to accept low-cost housing or to preserve lands of environmental value to the region, since