Local Property and State Income Taxes: The Role of Interjurisdictional Competition and Collusion

Thomas J. Nechyba

NBER Working Paper No. 5419
Issued in January 1996
NBER Program(s):   PE

This paper attempts to address two long standing questions in Public Finance: (i) why is the property tax, despite popular complaints about its fairness, the almost exclusive tax instrument used by local governments, and (ii) why do we consistently observe higher levels of governments undermine local property tax systems through income tax funded grants and state imposed caps on local property tax rates. A new intuitive argument to explain (i) is presented and tested in general equilibrium simulations which utilize a compu- table general equilibrium model of local public finance with parameters set to be consistent with micro-tax data. Different types of agents are endowed with income and houses and are able to move to their most preferred house in their most preferred jurisdiction. Also, agents vote myopically on local property tax rates while non-myopic community planners set a local income tax. Six possible objective functions for community planners are postulated, and all 6 lead to the same equilibrium outcome: community planners will always set local tax rates at or close to zero. When faced with popular sentiment against the property tax, community planners can collude and introduce local income taxes simultaneously to prevent adverse general equilibrium migration and price changes. Since zero income tax rates are dominant strategies however, such an agreement is only enforceable if an outsider like the state government steps in. State grants funded through a state income tax can play such an enforcement role.

download in pdf format
   (468 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5419

Published: Journal of Political Economy, 105(2), 351-385, 1997. citation courtesy of

Users who downloaded this paper also downloaded* these:
Nechyba t0190 Existence of Equilibrium and Stratification in Local and Hierarchical Tiebout Economies with Property Taxes and Voting
Wu, Gyourko, and Deng w16189 Evaluating Conditions in Major Chinese Housing Markets
Barattieri, Basu, and Gottschalk w16130 Some Evidence on the Importance of Sticky Wages
Acemoglu and Cao w16411 Innovation by Entrants and Incumbents
Chiu, Meh, and Wright w17512 Innovation and Growth with Financial, and other, Frictions
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us