Local Tax Rates Research Articles

The Effect of Spillovers and Congestion on the Segregative Properties of Endogenous Jurisdiction Structure Formation

This paper analyzes the eect of spillovers and congestion of local public goods on the segregative properties of endogenous formation of jurisdiction structure. We consider a local public good model based on Tiebout intuitions. Households living in the same place form a jurisdiction and produce a local public good. In every jurisdiction, the local public good is nanced through a local tax on household’s wealth. Local wealth tax rates are democratically determined in all jurisdictions. Households also consume housing in their jurisdiction. The housing prices are competitive, which means that, in every jurisdiction, the demand of land from households who choose to locate there is equal to the amount of housing supplied by the absentee landlords. Households may change their location, and then housing prices may be modied too. We prove that, for any production function of local public good and any coecients matrix of local other jurisdiction’s public good spillovers, the condition identied by Gravel and Thoron (2007) remains necessary and sucient to have every stable jurisdiction structure segregated by wealth.

Immigrant location and network effects: the Helvetic case

Purpose – The purpose of this paper is try to answer the following question: to which extent the observed location pattern is driven by network effects or by traditional location factors, like the structure and behaviour of the local labour market, housing market, public goods, and local tax rates? Design/methodology/approach – The paper uses an econometric model derived from random utility maximization. This model is estimated on a panel of Helvetic labor market areas, using a two stages estimation method. The first stage allows the network effect to be estimated. In the second stage, it estimates the impact of standard location factors. Findings – The paper finds evidence of a very strong network effect. This network effect is a very important location factor and implies that a location may attract current immigrants mainly because it attracted previous immigrants, even if the traditional location factors are not a source of attractiveness. Research limitations/implications – The present study corroborates earlier work on the Italian case. There is still some work to be done for taking account of the highly localized nature of network externalities. Originality/value – The impact of network on migrants' behavior is a hotly debated issue. However, there is almost no analysis of this impact on migrants' location. Conversely, if the high level of concentration of immigrants is a well known stylized fact, there is almost no study of the factors explaining this concentration. The research starts filling these two gaps.

The impact of tax rates, political partisanship and economic variables on the distribution of state and local tax burdens

This study finds that the effective state and local tax rate for the top 1% of income households as a percentage of the effective state and local tax rate for the bottom 20% of income households in 2002 is significantly influenced by whether a state has a multi-rate income tax, right-to-work laws, the liberalism of a state's electorate, the average tax burden in a state and past tax policy. Democratic Party strength in state government, Republican or Democratic Party institutional control of state government, change in real per capita income, a Democratic Governor and the change in the share of income going to the top 1% of income households are not significant predictors. The empirical results are identical for the top 2–5% of income households to the bottom 20% of income households.

Taxes, Agglomeration Rents and Location Decisions of Firms

The goal of this paper is to analyse the impact of interactions between tax rates and agglomeration rents on location decisions of firms within Belgium. In the theoretical literature it is argued that both location determinants may weaken each other’s impact. Using the number of new firms at the sector level for 43 Belgian districts, we show that local effective tax rates either have no or a negative impact on location decisions. Moreover, both types of agglomeration rents in a district are important for location decisions. The presence of firms in a district attracts new firms, while the presence of firms in the same sector deters firm entry due to competition. However, the interaction effect between taxes and agglomeration rents on firm entry is significant. We show that a higher effective tax rate in a district weakens the positive impact of the agglomeration rents on location decisions of firms.

On the Determinants of Local Tax Rates: New Evidence from Spain

This paper studies the determinants of local tax rates. For the two main local taxes in Spain - the property tax and the motor vehicle tax - we test the existence of tax mimicking, yardstick competition and political trends in a sample of 2,713 municipalities. Using different spatial models, the results support the hypothesis of tax mimicking, with coefficients over 0.40. We also show the relevance of political variables such as the ideology of the incumbents and political fragmentation. The fact that incumbents with weaker political support display stronger mimicking behaviour is interpreted as evidence in favour of yardstick competition. Finally, we find incumbents mimic neighbouring municipalities ruled by the same political party, confirming the political trends hypothesis.

Granting Public or Private Consumption? Effects of Grants on Local Public Spending and Income Taxes

While the literature on how intergovernmental grants affect the budget of receiving jurisdictions is numerous, the very few studies that explicitly deal with likely endogeneity problems focus on grants targeted towards specific sectors or to specific type of recipients. The results from these studies are mixed and make clear that knowledge about grants effects is to this date still insufficient. This paper contributes by estimating causal effects on local expenditures and income tax rates of general, nontargeted grants to Finnish municipalities. This is done in a difference-in-difference model utilizing policy-induced increases in grants to a group of remotely populated municipalities. The robust finding is that increased grants have a negligible effect on local income tax rates, but that there is an immediate one-to-one correspondence between grants and local expenditures. Furthermore, expenditures continue to increase also some time after the grant increase, although this response is estimated less precisely. The flypaper behavior displayed by the treatment group can potentially be explained by “separate mental accounting” – i.e., voters treating the government budget constraint separately from their own.

The Effect of Local Option Sales Taxes on Local Sales

Because retail sales taxes generate substantial revenue for many local governments, public officials contemplating differential local option tax rates must carefully assess the potential impacts of such decisions on purchasing decisions. The authors use a unique pooled time series to examine these impacts and apply a methodology that permits an analysis of the effects on purchasing decisions of sales tax rate differences across numerous consumer goods. The results indicate that the response to sales tax rate differences depends on the general characteristics of the goods being purchased. A unique variable that controls for the distance to the next significant alternative for making a purchase also provides key insights. The observed significance for this variable and its interaction with tax rates has significant public policy implications.

Tax interactions among Belgian municipalities: Do interregional differences matter?

This paper tests the existence of strategic interactions among municipalities, based on a panel of Belgian local tax rates from 1985 to 2004. A special emphasis is put on the role of the interregional differences in Belgium. Our results partly confirm previous findings for Belgium suggesting that municipalities interact over the local surcharge on the (labor) income tax rate but not on the local surcharge on the property tax. Using spatial econometrics tools and an original methodology for specifying weight matrices, we find that municipalities are sensitive to the local income tax rates set by only their closest neighbors. We cannot reject the hypothesis that interregional differences matter for municipalities belonging to the Brussels region: for the local income tax rate, the intensity of interactions is shown to be higher between municipalities belonging to the Brussels region than between municipalities belonging to different regions.

Yardstick Competition in German Municipalities

Does increasing transparency improve fiscal policy behavior of local governments? One way this could take place is via Yardstick Competition between incumbents of neighboring municipalities. This paper contributes to the literature by introducing a simple model which employs probabilistic voting to show the effect of Yardstick Competition on the amount of political rents diverted from the tax revenue. Since additional rents lower the probability of being reelected, the incumbent will reduce equilibrium rents if voters use information on fiscal performance in similar municipalities to evaluate the incumbent's quality. I test this hypothesis on a panel dataset of municipal budget and electoral data in the german state of Northrine-Westphalia. I show evidence for Yardstick Competition in the local business and property tax rates.

Property taxation and rural land values: Their effect on private forestland ownership structure in Texas

The objective of this study was to estimate the effect of property tax and rural land market value on the ownership structure of private forestland in Texas. Using county-level panel data in an Instrumental Variable regression framework, we estimated the effect of property tax rate and rural land value on two measures of ownership fragmentation: the total number of private forest landowners and the average size of private forest holdings. The results indicate that after controlling for the total amount of private forest area in a county, both property tax rates and rural land values increased ownership fragmentation. However, the rate of ownership fragmentation was relatively inelastic in both property tax rate and rural land value. While further restructuring local property tax rates might minimize the negative effect on private ownership dynamics, policy instruments that decrease the disparity between productivity value and market value of rural forestland might be needed to check the ongoing ownership fragmentation in Texas and elsewhere in the United States.

Seasonal Homes and the Local Property Tax: Evidence from New York State

AbstractThis study examines the growth of seasonal (i.e., second or vacation) homes and their impact on local property tax rates using evidence from towns and villages in New York State between 1990 and 2000. We find that a greater concentration of seasonal homes in a municipality is associated with a lower effective property tax rate in towns, and a higher rate in small and rural villages. An alternative measure of tax burden, property taxes as a percentage of median household income, is not related to the presence of seasonal homes in towns but is positively related in small and rural villages. Our findings for towns contradict the findings of an earlier study by Fritz (1982) that found that an increase in town property allocated to vacation homes was significantly associated with an increasing property tax rate, although our findings for villages supports his findings.

Tax Interactions among Belgian Municipalities: Does Language Matter?

This paper tests the existence of strategic interactions among municipalities using a panel of Belgian local tax rates from 1985 to 2004. A special emphasis is put on the role of the language spoken in the various municipalities. Our results first confirm previous findings for Belgium suggesting that municipalities interact with each other over the two main local tax rates, the local surcharge on the (labor) income tax rate and the local surcharge on the property tax. Using tools of spatial econometrics and an original methodology for specifying weights matrices, we find out that municipalities are sensitive to tax rates set by their close neighbors only. We also reject the hypothesis that the language does not matter: in the within model and for the local income tax rate, the intensity of interactions is shown to be lower between municipalities speaking different languages than between municipalities speaking the same language. That observation is particularly relevant for today Belgium and might be viewed as a contribution to the ongoing debate on the regionalisation or partial decentralization of some taxes.

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

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.

No Longer a Tax Haven? The Impact of Taxes on Internet Purchase Behavior

Using the online transaction data of 88,814 U.S. households in 2006, we analyze how local tax rates affect online purchasing behavior. Although earlier survey-based research has found that consumers who live in high-tax localities are more likely to shop online, our transaction-based data show the opposite. We find that higher local tax rates are associated with lower online expenditures, reduced transaction frequency, and a lower probability of making an online purchase. A disaggregate analysis shows that increased sales tax does not significantly boost demand from tax avoiding retailers but significantly lowers demand for online retailers that collect tax. In addition online shoppers are more than twice as sensitive to tax as traditional store shoppers. Finally, we document that tax losses from Internet sales are more moderate than previously estimated.

New spatial econometric techniques and applications in regional science

The papers appearing in this special issue of Papers in Regional Science, which is devoted to spatial econometrics, come from the First International Conference of the Spatial Econometrics Association held in Cambridge (UK) 12-14 July 2008. This conference was the first official meeting of the new association, which was established in May 2006 in Rome and which has already attracted more than 150 members from around the world. At the Cambridge conference there were close to 120 delegates and more than 100 papers were presented. With regard to the eight papers appearing in this special issue, we would particularly like to thank the authors and the referees for their contribution to what we believe is an interesting and lively selection. Recent years have seen a real explosion in the application of spatial statistical models in all branches of social sciences and in particular in economics. Spatial econometrics models have been used to analyse different topics (see for example Anselin et al. 2004 for a review) and as a matter of fact spatial regression techniques are now becoming an established component in the applied econometrics toolbox, as witnessed by the increasing attention given to this topic in standard econometrics textbooks (Maddala 2001; Woolridge 2002; Gujarati 2003; Kennedy 2003; Baltagi 2008).

Providing for the Public Good: Corporate–Community Relations in the Era of the Receding Welfare State

In his pioneering research on corporate–community ties in Minneapolis–St. Paul, Galaskiewicz (1985a) examined the social conditions that guided corporate philanthropy in a given metropolitan area. Two conditions, however, suggest the need for revisiting the type of research taken on in that original study. First, Galaskiewicz's study lacked a comparative dimension for examining the institutional environments that drive variation across localities. Second, a great deal has changed in the institutional conditions that drive corporate ties to their communities since the 1980s and early 1990s, the most important institutional change coming from the Tax Reform Act of 1986 . We identify two significant factors that contribute to variation in local philanthropic commitments of corporations to the metropolitan communities in which they are headquartered. First, local corporate tax rates increase corporate giving overall, but they drive down corporate commitments to their localities. Second, the local state's involvement in the Low–Income Housing Tax Credit (LIHTC) program of 1986 also drives down local corporate giving. Thus, activist states that are successful in capturing the fiscal resources of corporations through a variety of institutional mechanisms end up driving down the philanthropic commitments of the corporations that are headquartered in those localities. We illuminate these relationships through in–depth qualitative research in three case cities and data on a nationally representative sample of 2,776 corporations.

A GLOBAL SUPPLY CHAIN PROFIT MAXIMIZATION AND TRANSFER PRICING MODEL

In environments where tax rates in local regions do not represent major decision factors, a cost minimization methodology, which represents the most common optimization modeling approach for integrated manufacturing and distribution planning, can help formulate an effective integrated plan. However, when planning flexibility or alternatives exist because of differing local country tax rates and types and intra‐company transfer pricing options, cost minimization methodologies may inaccurately identify profit‐maximizing global production and distribution plans. Instead, a profit maximization model that explicitly evaluates decisions such as where to incur tax liabilities and how to set intra‐company prices may be required to develop an integrated global manufacturing and distribution plan. In this paper, we discuss and formulate a model that yields profit maximizing global production and distribution plans. We discuss the managerial implications of our results, and the potential applications and benefits of the model.

Capital structure and international debt shifting

This paper presents a model of a multinational firm's optimal debt policy that incorporates international taxation factors. The model yields the prediction that a multinational firm's indebtedness in a country depends on a weighted average of national tax rates and differences between national and foreign tax rates. These differences matter as multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested using a novel firm-level dataset for European multinationals and their subsidiaries, combined with newly collected data on the international tax treatment of dividend and interest streams. Our empirical results show that a foreign subsidiary's capital structure reflects local corporate tax rates as well as tax rate differences vis-à-vis the parent firm and other foreign subsidiaries, although the overall economic effect of taxes on leverage appears to be small. Ignoring the international debt shifting arising from differences in national tax rates would understate the impact of national taxes on debt policies by about 25%.

The Impact of Fiscal Equalization on Local Expenditure Policies - Theory and Evidence from Germany

This paper uses a simple model of fiscal competition in taxes and public inputs among local jurisdictions to analyze the incentive effects of fiscal equalization transfers. We find that a budget-compensated increase in the contribution rate to a system of fiscal equalization not only induces higher local tax rates (e.g., Koethenbuerger, 2002; Bucovetsky and Smart, 2006) but also lower budgetary shares of the public input to production. The subsequent empirical analysis is based on a rich data set of German municipalities and provides strong evidence for the existence of an incentive of fiscal equalization transfers on local expenditure policies.

Tax Sensitivity in Electronic Commerce*

AbstractEmpirical research into the impact of taxation on e‐commerce has concluded that there is a significant positive relationship between local sales tax rates and the likelihood that a person will shop online. This paper finds that the tax sensitivity for online purchases at the local level is much lower than previously estimated and is not significant under previous general models. However, by using a splined tax‐rate function, this paper finds that consumers living in counties with high sales tax rates are still sensitive to tax rates when deciding whether to shop online, while those in counties with low tax rates exhibit no significant sensitivity.