The Grants are Falling! The Grants are Falling! How Municipal Governments Changed Taxes in Response to Provincial Support in New Brunswick, 1983–2003

Abstract

The real value of grants to New Brunswick municipal councils from the provincial government fell dramatically from 1983 to 2003. At the same time, municipal property tax rates increased, especially among municipalities with comparatively low tax rates in 1983. This study uses an econometric model of the joint determination of local property tax rates and local property tax bases to examine the hypothesis that municipal responses to falling grants were constrained by tax competition. After controlling for observable characteristics, there is little evidence of spatial interaction among jurisdictions, suggesting that tax competition was not a major factor in municipal decisions. The grant cuts themselves appear to be a far more important determinant of changes in property tax rates. There is also some evidence that the tax base is sensitive to a municipality's own tax rates. However, the elasticity of the tax base with respect to the tax rate is small enough that there remains scope for municipalities to increase tax revenue by increasing their tax rates.