Association for Public Policy Analysis & Management

In 2011, under Governor Andrew M. Cuomo, the State of New York passed a property tax cap law that established a limit to the property tax levied in which the annual growth rate of the property tax is held to 2% or the rate of inflation, whichever is lower. The governments subject to the law are all local governments (e.g., counties, cities, towns, villages, independent school districts, and most special districts), excluding New York City. The imposition of the property tax cap law can restrict a local government’s ability to promote economic growth and can perpetuate regional inequalities.

This empirical work investigates the impact of a tax an expenditure limit (TEL) on local government economic development. I examine the economic development impact (per capita income and employment in various sectors) under the property tax cap (the difference between the proposed tax levy and levy allowed by the TEL). Prior local government research has focused on the impact of TELs on fiscal structure and spending (Mullins, 2004; Mullins, & Wallin, 2004), ratings and interest costs (Benson & Marks, 2010; Johnson & Kriz, 2005; Moldogaziev, Kioko, & Hildreth, 2016; Poterba & Rueben, 2001; Wagner, 2004), use of special districts (Benson & Marks, 2010; Bowler & Donovan, 2004; Carr, 2006; McCabe, 2000), and tax supported debt (Millins, Hayes, & Smith, 2012).

I develop a theoretical framework to illustrate how the economic development capacity of local governments is impacted by the TEL. I hypothesize that a government with larger differences between a proposed tax levy and actual levy under the TEL will have lower economic development. Moreover, I expected that these governments disproportionately rely on alternative sources of funding (e.g., unrestricted cash, unassigned fund balances, and short-term debt) to replace the revenue that they would have been levied without the TEL.

I test the theoretical framework empirically using data of local governments (county, city, town, village, and school districts) in the State of New York for the period between 1995 and 2015. The data comes from two main sources. The Office of the Comptroller of New York which covers local government data on the property tax cap, revenues, expenditures, balance sheet, and debt between 1995 and 2015. The U.S. Bureau of Economic Analysis which covers economic development data in the SA30 Economic Profile. Control variables are implemented using data from the American Community Survey, U.S. Bureau of Labor Statistics, and U.S. Bureau of Economic Analysis. Combining each data set and using relevant control variables, the empirical framework uses time and jurisdiction fixed effects to investigate the impact of a property tax cap on the economic development of local governments.

I expect local governments reporting larger differences between a proposed levy and their actual levy to have lower levels of economic development. I also believe that governments that experience lower levels of economic development under the TEL will rely more on alternative sources of revenue. By corroborating my hypotheses, I seek to further contribute to the literature regarding the impact of TELs on local governments.