Natural amenities and Neo-Hobbesian local public finance

Abstract

A revenue maximizing local government must obey a migration constraint when levying taxes. Using this insight, I develop a simple theory of taxation that suggests natural amenities are a key factor influencing local tax rates. Natural amenities confer rents to residents which governments and interest groups compete to extract. Revenue maximizing local tax rates are increasing in the level of natural amenities, increasing in moving costs, and decreasing in households' reservation utility. Using data on natural amenities and taxation for US counties, I find that local tax rates are in-fact increasing the level of natural amenities. Finally, I suggest an alternative interpretation of the "tax revolts" of the late 1970's. Rather than an attempt to constrain Leviathan, local property tax reform (such as California's Proposition 13) and restrictions on housing supply are the outcome of competition over amenity rents in which property owners successfully capture a monopoly position at the expense of other social groups including renters and local government.