Content area
Abstract
This research is inspired by the financial situation of Canadian municipalities, facing, on the expenditure side, increasing demands, especially for infrastructure upgrading, and, on the revenue side, a combination of slow-growing own property taxes and reduced grants. This dissertation explores municipal tax base diversification, often suggested as the best way of providing cities with reliable financial resources while preserving their operational flexibility, and intergovernmental fiscal competition, a force that may constrain the benefits of tax diversification. Of several potential tax candidates, consideration is restricted to the highly revenue productive sales and payroll taxes, widely used by U.S. municipalities.
Initially, tax base diversification is examined in the case of an isolated municipality in order to establish a benchmark. Next, the strategic setting is introduced through a multi-jurisdictional environment where there is interjurisdictional competition for mobile commercial property investment. The actual benefits from adding new taxes are determined with and without limited residential mobility — that is, residential mobility limited to cross border shopping or commuting. Finally, the derived reaction functions are estimated, using municipal data for Washington State, to identify the existence of strategic tax interactions and the impact of fiscal constraints.
The theoretical analysis confirms that tax base diversification raises the efficiency of public service provision, reduces overtaxation of commercial property and promotes benefit taxation. Although these benefits are observed to decline in the multi-jurisdictional environment, the diversified tax system generally continues to be more efficient. A potential reduction in the benefits depends not only on the degree of capital mobility and individual preferences, but also on the extent of cross-border shopping and commuting. In the absence of these cross-border interactions, the introduction of a sales tax is preferred to a payroll tax, but, in their presence, the opposite is true. The strength of municipal tax competition is shown to diminish if property tax rates are differentiated to extract rents from commercial property and/or if private good consumption is enhanced through public service provision.
The empirical examination of fiscal interactions among Washington municipalities reveals positive interactions in some taxes and no interactions in others. The presence and type of constraints on municipal tax choice prove to be important determinants of these relationships. The non-existence of strategic responses is the outcome when there are tax rate limits that are closely followed. On the other hand, the introduction of a tougher growth restriction on property tax revenues that did not result in the overwhelming adoption of the maximum allowable limit is found to have no effect on the existing municipal interdependence of property taxes. In contrast, attempts to restrict tax base exporting of municipal business taxes is shown to reduce the evidence of direct positive competition in these taxes.
