Household mobility and the political economy and welfare effects of local tax limits

Abstract

I apply a Tiebout model of multiple local jurisdictions to study the political economy and welfare effects of state limitations on the taxing powers of local governments, investigating the effects of such restrictions on housing markets, community composition, and the types of expenditures undertaken by local governments. The Tiebout model in this paper is distinguished by voters choosing values of multiple local policy (tax and expenditure) instruments, a mixture of renters and owners residing in each community, and different degrees of household mobility. I characterize and provide sufficient conditions for voting equilibrium even with multiple policy instruments and varying housing tenure by developing a novel application of the Besley and Coate (1997) model of representative democracy. The different degrees of household mobility following the introduction of tax limits have significant impacts on equilibrium values, the predicted level of political support, and the welfare effects associated with these tax limits. In addition, almost none of the tax limits increase overall welfare, even though many gain majority support. The only case that is predicted to have majority support and increases welfare is when all households are mobile, head and income taxes have previously been constrained, and property taxes are then limited. These results accord well with the hypothesis of Vigdor (2001)—that much political support for tax limits comes from a desire by individuals to limit taxes in localities other than their own.