The political economy of local taxation: The effects of Tiebout mobility and referenda on local taxes

This dissertation examines the tax base choices of local governments and the effects of fiscal institutions in budget referenda on the magnitude of local taxes and the size of government budgets. The thesis begins by examining why local governments rely heavily on the property tax, even when they have access to another revenue source, using data from states' recent experiences of permitting local school districts to use both property and residence-based income taxes. The theory that local governments rely on the property tax because it is a less mobile tax base than the income tax is tested using data from 610 Ohio school districts. The residence-based school district income tax is used by only 119 school districts in addition to the traditional property tax. Both the expected probability that a school district adopts an income tax and the expected percentage of local revenue raised from the income tax decline sharply as the number of nearby school districts increases. This is the first evidence that the dominance of the property tax in local tax structures is caused by fiscal competition for mobile residents.;The second part of the thesis examines the effects of fiscal institutions on the size of the government budget in agenda-setting models. A repeated agenda-setting model of voting in budget referenda is used to examine the effects of budget reversion rules on the size and growth of the government budget. In this model, reversion budget rules that make the automatic growth in the government budget slower than the growth in the median voter's ideal budget limit the power of a budget-maximizing government to obtain spending greater than the median voter's ideal budget. Finally, the thesis examines the effects of supermajority requirements for the approval of budgets in referenda on the size of the government budget.