THE INCENTIVE EFFECTS OF PROPERTY TAXES ON LOCAL GOVERNMENTS

This paper applies the ideas of Brennan and Buchanan (1977, 1978, 1980 ) to local property taxes. When local governments maximize their reven ues, property taxes provide incentives for adequate amenity provision. Local amenity provision determines property values which then determi ne local tax revenues. As long as the demand for housing is inelastic, property-taxes will provide stronger incentives for local governments than lump-sum taxes. As current property values reflect expectations about future amenity levels, property taxes create incentives for even the most myopic government to invest for the future. Local property t axes can also act to limit the incentives of localities to tax; there are cases where higher levels of local property taxes lead to lower ov erall tax burdens. These ideas are applied to the tax reform in the la te 1970s; one reason that tax reform may have been so successful is th at in a period where land prices are driven by many forces other than government amenities, property taxes lose their value as incentive dev ices.