The Political Economy of the Property Tax: History, Institutions, and Fiscal Conflict in State and Local Government

Abstract

This dissertation studies the property tax and its role in the development of American state and local government. As the primary source of revenue for local governments -- and at one point for state and territorial governments also -- the tax is essential for public service provision, including public education. Yet the property tax has been riddled in controversy since its inception and has been at the root of countless "tax revolts," leading to large-scale reforms with lasting effects on state and local public finance. Using historical and contemporary methods, the three essays of this dissertation help make sense of two important problems associated with the property tax: the difficulty in assessing all forms of property under the old regime of the general property tax, and vertical tax competition, which impacts thousands of local governments across the country who share part of the same property tax base. My first chapter contributes to the blossoming literature of historical political economy (HPE) and the history of taxation in the United States. In "Taxation and State-Building on the Frontier: Public Finance, Economic Development, and the General Property Tax in 19th Century Colorado,” I study the economic history of property and its taxation in an important frontier state. I accomplish this by assembling a new dataset using property tax records held at the Colorado State Archives. This essay contributes to our understanding of the development and evolution of state and local taxation systems in the Mountain West region, a geographic area largely ignored in the literature. While measures of total assessed valuation of property by county are available in the decennial census, the data I have compiled are the first \annual statistics of assessed valuation from 1863 to 1887. Further, I provide not only total assessed valuation by county, but the assessed valuation of each specific type of property for which the general property tax applied. This allows for a much finer breakdown of property than is available in the decennial census and thus a better understanding of the relative importance of specific forms of real property like land and improvements over more elusive forms of personal property including stocks, bonds, industrial equipment, and railroad property. I additionally show that Colorado failed to tax key forms of personal property over this period, including that of its most important industry: mineral resource extraction. My second chapter, "The 'Crowding Out' Effects of Special Districts: Evidence from Colorado’s Metropolitan Districts,” explores how a distinct form of local government in the U.S. affects general purpose governments and school districts that share the same tax base. Although the literature on special districts is expansive, little attention has been paid to multipurpose development districts – known in Colorado as “metro districts” – created by real-estate developers to finance new real estate construction. Because these districts often lack residents at inception, developers can issue substantial debt that is later repaid through higher property taxes on the homeowners who buy properties in the developments. I investigate whether this dynamic constrains the fiscal capacity of overlapping governments -- particularly counties, municipalities, and school districts -- who themselves must obtain voter-approval for new debt of their own under Colorado’s notorious Taxpayer Bill of Rights (TABOR). Using a novel dataset linking geographic tax rates to parcel-level data on over 20 million residential properties from Cotality, I employ a quasi-experimental design to show that metro districts have crowding out effects. These effects vary by specification, level of government, and mill levy type. My third chapter, "School Finance Reform and Local Property Tax Setting: Evidence from Michigan’s Proposal A," examines vertical fiscal externalities by studying the effects of Proposal A, Michigan’s 1994 school finance reform that restructured the mix of state and local revenue for public education in an effort to address years of funding inequities among school districts. The shift in taxing authority reduced overall property tax burdens and limited future increases. I test whether local governments responded by raising their own non-school levies by constructing a panel of Michigan townships and municipalities spanning the years before and after Proposal A. I find that local property tax rates were sensitive to the size of school rate reductions, with larger school rate reductions resulting in larger increases to local mills. I also find heterogeneous effects depending on certain characteristics of the jurisdictions studied. In particular, in jurisdictions where more of the tax base is made up of owner-occupied housing, local mill rate increases were considerably dampened, and in some cases, actually reduced. Other important mechanisms driving local responses include per capita levels of local debt and per capita local expenditures. These findings contribute to understanding how major tax reforms impact local government fiscal behavior and intergovernmental tax competition.