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Property tax limitations: an interpretative review.

Article Excerpt
INTRODUCTION

As of 2006, only five of the 48 states in the continental United States have absolutely no explicit limits on some aspect of property taxation. The remaining 43 states each have at least one of the three most common limitations in place. The most numerous types of limitations, revenue and tax rate limits, explicitly constrain local government behavior. The third type, limitations on increases in the taxable value of property, is less common and does not explicitly constrain local government behavior. What these limits have in common is their direct constraint of individual property tax payments. Previous research on the motivations for property tax limitations has focused on constraint of government behavior, electing not to focus on the common effect of these limitations on individual property tax payments.

Vigdor (2004) provides a detailed review of the most prominent explanations for the existence of statewide limitations on local governments. (1) As Vigdor notes, in the Tiebout (1956) model voters in an individual jurisdiction would never submit to limitations on their local government revenues and rates so long as residents have the power to dictate revenue and rate policy according to their preferences. The lack of motivation for limits when residents have control over policy suggests that perhaps residents have limited control over policy. This idea that residents have limited control over local policies on revenues and tax rates is often called the "Leviathan" model of local government. In the context of the Leviathan model, local governments raise local property tax revenues that are excessive and inefficient.

The "state regime shift" theory does not require leviathan governments. Instead, the state regime shift theory focuses on voters' desire to have the state finance a larger portion of necessary revenues with income and sales taxes, thus reducing reliance on local property taxes (see Fischel (1989) and Nechyba (1997)).

Vigdor (2004) proposes an alternative to these theories, noting that limitations on local government allow voters to influence local tax and expenditure decisions in jurisdictions where they do not reside. This motivation exists even when the median voter controls policy within each jurisdiction. The median voter's control of local policy requires that these limitations be passed by the state legislature. Non-residents wish to limit local government behavior in order to make other communities more attractive to them in their roles as absentee landlords, wage earners, and possibly future residents. Vigdor's non-resident theory, like the state regime shift theory, does not require that voters have limited control over their own local government fiscal policies.

Vigdor's non-resident theory considers a motivation for limits that exists without Leviathan governments. Vigdor's theory, however, still relies on a government that needs to be restrained, in this case by non-residents, and this desire for restraint of local government is the motivation behind the property tax limitation.

Some form of property tax limitation might still be desirable even in the absence of any motivation to constraint excessive or inefficient government expenditures. In order to understand this possibility it is necessary to discuss how each of the three primary limits affects individual property tax payments. In particular, it is important to show how individual tax payments change for reasons other than revenue changes. That is, individual tax payments can change even when a district's revenue requirements are constant, and this turns out to be key in understanding why some form of property tax limitation might exist without excessive or inefficient government expenditures.

Consider the example of an individual homeowner (i) owning property with a taxable value of [v.sub.i] in a jurisdiction (j) with a property tax rate of [[tau].sub.j]. Her property tax liability to jurisdiction j at time t is:

[T.sub.ijt] = [[tau].sub.jt] x [v.sub.ijt].

It is important to note that, dropping the time subscripts, the tax rate is defined as the ratio of the desired property tax revenue, [R.sub.j], to the total amount of taxable value in the jurisdiction, [V.sub.j],

[[tau].sub.j] = [R.sub.j] / [V.sub.j].

Denoting the total taxable value of all residential (homeowner) property in jurisdiction j as [H.sub.j], the average taxable value of residential property as [H.sub.j], and property tax revenue per homeowner as [R.sub.j], it can be shown that an individual homeowner's property tax liability is:

[T.sub.ij] = [R.sub.j] x ([v.sub.ij]/[V.sub.j]) = ([[bar.R].sub.j]) x ([v.sub.ij]/[[bar.H].sub.j]) x ([H.sub.j]/[V.sub.j]).

A resident homeowner's property...