Abstract
This paper is the first public finance study to provide a systematic evaluation of municipal dissolution in the context of U.S. Using local government annual financial statistics from 1996 to 2019 in the state of New York, I first employ an event study framework to analyze whether economies of scale are present when a municipal government is dissolved. Then, based on parcel-level property sales data in New York from 2000 to 2018, I combine propensity score matching (PSM) and difference-in-differences (DID) to provide an overall evaluation by investigating how much home buyers value dissolution, as measured by how much they are willing to pay to live in a municipality that has recently dissolved. Overall, I find that the dissolution of a municipal government does lead to short-term changes in revenue composition, but it does not have any significant impact on aggregate government size or house sales prices. The empirical findings suggest that the economies of scale, which is the claimed primary benefit behind centralization, may not be as large as typically expected or, at least, it does not substantially outweigh other values residents appreciate, such as decentralized service provision, policy agenda control, and local culture.
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Notes
Based on the “New N.Y. Government Reorganization and Citizen Empowerment Act” enacted in 2009, the key difference between the board-initiated process and the voter-initiated procedure lies in the development of a dissolution plan. When initiated by the governing body, the board is responsible for formulating a dissolution plan before a referendum is held. The plan is used to educate and inform the village residents of the consequences of their vote. On the contrary, in a voter-initiated process, a dissolution plan is not required before the dissolution referendum passes, and the plan just needs to be approved by the governing board after the referendum. See https://www.dos.ny.gov/lg/publications/Consolidation%20and%20Dissolution%20Procedures%20summary.pdf
Dissolution differs from consolidation in several ways, though they are often interchangeably used. In particular, village dissolution can be unilaterally determined by its own residents without the consent of underlying-town residents, while consolidation has to be initiated and approved by all consolidating entities. Following the legal definition in Article 17-A of General Municipal Law https://www.nysenate.gov/legislation/laws/GMU/A17-A, this article prefers to use dissolution over consolidation.
More information about those grants can be found at https://www.dos.ny.gov/lg/lge/index.html, https://www.dos.ny.gov/lg/pdf/LGE%20Report%20SFY%202016-17.pdf and https://www.governor.ny.gov/news/9th-proposal-governor-cuomo-s-2016-agenda-municipal-consolidation-competition-continue-making.
Yinger (2012) also pointed out that village residents may receive conflicting property assessments for taxes levied by overlapping units of governments. See http://cpr.maxwell.syr.edu/efap/about_efap/ie/Aug12.pdf
Some scholars focus on how property tax is capitalized into housing price (Oates, 1969; Yinger et al., 1988), while others study whether the quality of public service and environmental amenities are capitalized into property values and topics range from crime rate, water quality (Leggett & Bockstael, 2000), proximity to open space (Anderson & West, 2006), access to public parks (Lall & Lundberg, 2007), quality of education (Nguyen-Hoang & Yinger, 2011) to HOAs (Meltzer & Cheung, 2014). These studies confirm the existence of capitalization and are helpful in revealing the composition of housing prices associated with government structure changes, as in this study.
Another important strand of relevant literature surrounds property tax incidence, capitalization, and the validity of the Tiebout-Hamilton Model. See Tiebout (1956), Hamilton (1975), Epple et al. (1978), Fischel (1985, 1992), Mieszkowski and Zodrow (1989), Ross and Yinger (1999), and Zodrow (2001, 2014).
For simplicity, V shows up in linear form. More discussions on this could be found in Yinger (2015).
We dropped Mastic Beach from our analysis for two reasons. First, it is difficult to neatly separate the impact of its incorporation from that of dissolution within our sample period. Second, the short history of Mastic Beach substantially differs from all other dissolved villages, which usually have a history of more than 100 years.
The only difference lies in Panel 3 of Fig. 4—the IW estimates show own-source revenue jumping up 7–8 years after dissolution whereas the baseline estimates do not. This is primarily driven by a continuously increasing trend of own source-revenue after dissolution in Andes area and by the fact that the Village of Andes was dissolved much earlier than any other dissolution case in my sample. The author is grateful to an anonymous reviewer for his question and suggestion on this issue.
For example, I get similar matching results and sample balance test results when omitting the percent of vacant housing units and percent of property values under $50 k (Heckman et al., 1997).
To improve matching quality, I limit matches to within 0.15 standard deviation for the log of the odds ratio from the logistic regression (i.e., log (P/1−P) where P is the propensity score). This is a tougher standard compared with the 0.25 standard deviation suggested in Guo and Fraser (2010).
For example, the county share of Medicaid spending significantly contributes to the heavy property tax incidence in New York. See https://www.empirecenter.org/publications/shifting-shares/
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Acknowledgements
The author is very grateful for helpful comments from John Yinger, Bob Bifulco, Yilin Hou, Sharon Kioko, Larry Schroeder, Douglas Wolf, Phuong Nguyen-Hoang, Marc Holzer, Justin Ross, Michael Pagano, Julia Sass Rubin, Deborah Carroll, Michah Rothbart, and Carlianne Patrick. Special thanks go to Ron Davies and two reviewers for their constructive suggestions. Any errors are solely my own.
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The author received financial support from the Lincoln Institute of Land Policy.
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Zhang, P. The fiscal and economic impacts of municipal dissolution: evidence from New York. Int Tax Public Finance 30, 948–1001 (2023). https://doi.org/10.1007/s10797-022-09728-y
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DOI: https://doi.org/10.1007/s10797-022-09728-y