This paper examines tax competition among local governments that have overlapping physical boundaries.  A given locality has multiple jurisdictions such as counties, school districts, fire and water districts stacked on the same physical space and each sharing part or all of their property tax bases with each other.   The level of taxation by one jurisdiction affects overlapping jurisdictions’ ability to raise revenues because they are jointly constrained by voters' preferences for an overall property tax levy.  Governments may therefore strategically set their taxes in response to the policies of the other localities in the shared space.  This study seeks to identify the type of interaction that exists between county governments and school districts in Georgia.  Do these local entities mirror each other’s fiscal behavior or do they crowd each other out in competition for the same tax base? 

This study adopts the framework used in the horizontal tax competition literature (see Brueckner (2003) for a review) to model the strategic interaction between overlapping local governments.  Using a panel instrumental variables approach to identify the county property levy, I test whether the school districts strategically choose their own levy in response to county fiscal policy.  Initial results indicate that strategic interaction generates a positive yard-stick effect for the school districts.  This suggests that county tax increases do not crowd out school financing, but instead may provide a signal that the schools may also be able to raise their property levies.  Additionally, the first stage results of the analysis provide estimates of the relationship between growth in employee health benefit expenditures and the level of property taxation.