Finance and Economics Discussion Series

Fiscal Amenities, School Finance Reform and the Supply Side of the Tiebout Market

Byron F. Lutz
2009-18

Abstract: This study asks if local governments which provide a high level of public services per tax dollar attract housing capital. The first portion of the paper examines large shifts in property tax burdens induced by an unusual school finance reform in the state of New Hampshire. The estimates suggest that, in most of the state, communities with a reduced tax burden experience a large increase in residential construction. In the area of the state near the region's primary urban center (Boston), however, the shock clears through a price adjustment--i.e. by capitalizing into property values. The differing responses are attributed to differing housing supply elasticities. Furthermore, the shock induced communities with a lowered tax burden to enact more stringent land use regulations. The second portion of the paper uses a national sample and exploits variation in education spending levels arising from 1980s era school finance reforms. The results confirm the findings from New Hampshire--fiscal amenities have a significant impact on the location of residential capital and the impact is largest outside of dense, urban areas. These results, which are interpreted through the lens of a simple theoretical model, have important implications for a host of issues, including the equity and efficiency of local public goods provision, assessing who bears the burden of local taxation, and land use issues such as the location and pace of residential development and the causes of land use regulation.

Keywords: Property tax, Tiebout, school finance reform, housing supply elasticity, land use regulation