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

Abstract

This paper addresses two long-standing positive questions in public finance: why is the property tax, despite widespread popular complaints against its fairness, the almost exclusive tax instrument used by local governments and why do we consistently observe higher levels of governments (states) undermining local property tax systems through income tax-funded grants and state-imposed caps on local property tax rates? Results indicate that setting local income tax rates to zero is a dominant strategy for communities that face competition from neighboring governments and that only through higher government intervention can local income taxes be introduced. Copyright 1997 by the University of Chicago.