The Effects of Fiscal Competition on Local Property and Income Tax Reliance

Abstract

This paper examines why local governments rely heavily on the property tax, even when they have access to another revenue source, using data from Ohio’s recent experience of permitting local school districts to use both property taxes and residence-based income taxes. Nechyba’s (1997) theory that local governments’ reliance on the property tax instead of the income tax is due to fiscal competition for relatively high-income residents is tested using data from 610 Ohio school districts. The Ohio residence-based school district income tax is used by only 119 school districts, at low tax rates, to supplement the traditional property tax. The use of a local income tax declines sharply as fiscal competition increases, as measured by the number of nearby school districts. School districts with greater opportunities to export the burden of the property tax to non-residential property owners are less likely to adopt a local income tax.

School District Income Taxes: New Revenue or a Property Tax Substitute?

“…Spry () estimated an Ohio cross‐section probit regression to identify the determinants of school district income tax adoption by 1997. More than anything, Spry () observes that school districts were constrained by tax competition, which was measured as the number of districts within ten miles.…”

“…Spry () estimated an Ohio cross‐section probit regression to identify the determinants of school district income tax adoption by 1997. More than anything, Spry () observes that school districts were constrained by tax competition, which was measured as the number of districts within ten miles. Furthermore, Spry finds that an income tax was less likely to be adopted as the size of the industrial property base increased, but more likely to adopt with the amount of agricultural property.…”

School District Income Taxes: New Revenue or a Property Tax Substitute?

“…In general, they find evidence that is consistent with special interest groups, like farmers and businesses, supporting the tax instrument whose incidence is less likely to fall upon them. Spry (2005) estimated an Ohio cross-section probit regression to identify the determinants of school district income tax adoption by 1997. More than anything, Spry (2005) observes that school districts were constrained by tax competition, which was measured as the number of districts within ten miles.…”

Growth and Variability of School District Income Tax Revenues: Is Tax Base Diversification a Good Idea for School Financing?

“…Inclusion of this covariate also addresses the spatial dependence in the SDIT adoption (Hall and Ross ). Third, we balance on tax price (Spry ). We additionally match on the percentage of revenues from state and federal sources (Hall ).…”

“…Gill and Haurin () identify the percentage of business property tax base and percentage of farm population and the likelihood of a voter approval of tax levies as the three most important factors of income tax base choice. Spry () highlights the roles of interjurisdictional competition (number of school districts within 10 miles), the property tax price, and property taxes from business and agricultural property as drivers of income tax adoption at the school district level. Hall () confirms the importance of interjurisdictional competition in the decision to adopt a SDIT and adds income inequality, the percentage of commercial property, and the percentage of state revenues to the list of key factors.…”