Abstract
The analysis in this paper uses a circular model to compare four alternatives for funding infrastructure necessitated by commercial development: a mileage tax, a sales tax, and development impact fees, to a traditional property tax. The results suggest that infrastructure funding mechanisms may influence household travel distance due to policy induced firm entry. This result complements the existing literature which finds policies affect travel costs through changes in city size while the fixed size model presented here suggests travel costs are still important. Because firms capture transport costs, in the form of higher prices, in the model, a mileage tax increases the number of firms exceeding the socially optimal number. Through a system of impact-fee financing, firms internalize infrastructure costs which reduces the number of firms and approaches the socially optimal number. Sales taxes provide an intermediate case between fees and property taxes. The model of homogeneous households and monopolistic competition between firms provides results most applicable to policy for suburban jurisdictions.
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Notes
One could think of the mileage tax as being somewhat similar to a gas tax but without explicitly modeling commute time and speed as suggested by Keeler and Small (1977), etc. to consider the two equivalent requires some strong assumptions.
One could alternatively think of the n firms as shopping centers and the good as a bundle of goods purchased from a shopping center, thus relaxing the restrictive nature of the modeling assumptions.
The literature examining the effect of tax policy on city size is mixed with some studies such as Brueckner and Kim (2003) finding increased property taxes may increase city size and Song and Zenou (2006) finding that increased property taxes result in decreased city size. The differences are potentially explained by differing elasticity of substitution between housing and other consumption goods. These mixed results may apply to different areas as urban residents may have a greater elasticity of substitution than suburban or rural families looking for space. The model in this paper holds population density as fixed and excludes changes in density resulting from a jurisdictions choice of revenue instrument.
Matsumura (2000) demonstrates that the integer problem can be ignored with constant marginal cost of production, in this model c, and n \(\ge 3\).
If no additional infrastructure were constructed, the consumer would bear the cost of the infrastructure not constructed in the form of additional congestion and service degradation. This alternative is not explicitly modeled here.
A full derivation can be found in appendix 4.1.
The model presented here does not incorporate a reduction in congestion from the mileage tax, a subject for future research.
A full derivation can be found in appendix 4.2
This assumes the tax is not a subsidy.
A full derivation can be found in appendix 4.3.
A full proof can be found in appendix 4.4.
A full derivation can be found int he appendix.
A full derivation can be found in appendix 4.6.
A full proof can be found in appendix 4.7.
A full derivation can be found in appendix 4.8.
The model presented in this paper excludes property valuations but there is a literature examining the relationship between property values and tax rates. For example, Man and Bell (1996) find sales taxes in the Phoenix area are capitalized in home values and Yinger et al. (1988) who find property taxes to be only partially capitalized into home values.
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Jones, A. Mileage tax, property tax, sales tax, or fee: the best way to pay for commercial infrastructure that isn’t free. Rev Reg Res 36, 81–98 (2016). https://doi.org/10.1007/s10037-015-0099-3
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DOI: https://doi.org/10.1007/s10037-015-0099-3