The Effect of Property Reassessments on Fiscal Transparency and Government Growth: Evidence from Virginia

Abstract

An important concern to the efficiency of public finance systems is that voters suffer from various illusions that can politicians can exploit to expand the public sector. This paper contributes evidence of this effect on a public finance system through the revenue elasticity hypothesis, which is a form of fiscal illusion in which voters confuse tax rates with tax burdens in the approval of public spending. The applied empirical setting is Virginia cities and counties from 2001 to 2011, where the timing of mass property reappraisals is exogenous but known to local policymakers in setting the annual budget. The results indicate that mass reappraisals, which reduce tax rates, do cause property tax increases, as do reappraisals that will result in future tax rate increases. These revenue shocks are then smoothed into expenditures through the management of assets, indicating that policymakers prefer the spending to be drawn from future cash reserves rather than from immediate projects that might draw attention to the source of fiscal illusion.