The local decision to tax: Evidence from large U.S. Cities

Abstract

The structure of local taxation is an important determinant of the fiscal performance of decentralized public economies. In contrast to our understanding of local government spending, however, we know surprisingly little about how cities and states set taxes. This study specifies and estimates a model of the institutional, political, and economic determinants of the local decision to tax. Redistributive politics is an important determinant of local tax policy, at least for this sample of 41 large U.S. cities during the period 19617ndash;1986. The results cast serious doubt on the validity of the ‘representative’ or average taxpayer approach to behavioral modeling of fiscal policy for large, income diverse governments. The results allow us to predict the effects on local financing of removing federal tax deductibility of local taxes, an issue of current importance in the United States.