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State fiscal constraint and local overrides: a regression discontinuity design estimation of the fiscal effects

Abstract

Despite abundant evidence regarding the influence of US state-imposed tax and expenditure limitations on local governments, the causes and consequences of local overrides remain largely unexplored. This article comprehensively examines the fiscal effects of local overrides of Massachusetts’s state-enforced property tax limit. Existing evidence has shown that pressure from powerful local interest groups, such as public schoolteachers and public employees, is crucial for determining agenda-setting and the successes or failures of measures overriding the statewide property tax limit. In that sense, fiscal constraints are able to curb bureaucrats’ budget-maximizing behaviors. Empirically, a regression discontinuity design estimation shows that local property tax limit overrides increase local property taxes and total revenues, decentralize the state–local fiscal relationship, and improve local budgetary balance. However, overrides do not affect local government spending.

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Notes

  1. 1.

    Two ways of proposing overrides are possible. “Government officials can either propose a single override associated with a large override amount or split the override into multiple smaller ones, each of which is linked to a specific policy goal” (Wei and Butler 2020, p. 6). The latter is called the “menu” approach by Bradbury (1991).

  2. 2.

    The property tax limit in municipality i and in year t can be computed as follows:

    $${\text{Levy~limit}}_{{{i},{t}}} = \left( {1 + 2.5{\% }} \right) \times {\text{Levy~limit}}_{{{i},{t} - 1}} + {\text{Values~of~new~growth}}_{{{i},{t}}} \times {\text{Tax~rate}}_{{{i},{t} - 1}} + {\text{Override~amounts}}_{{{i},{t}}}.$$
  3. 3.

    The local appropriating body is “defined in towns as the board of selectmen, not town meeting. In towns without selectmen, a vote of the town council is required to present a referendum question to the electorate. In cities, a vote of the city council, with the mayor's approval where required by law, is needed.” (Refer to http://cltg.org/prop2_requirements-procedures.pdf for details).

  4. 4.

    Proposition 2½ also allows voters to exclude a debt or capital outlay expenditure from the property tax levy limit. Unlike the property tax limit override, debt or capital outlay expenditure exclusions are temporary one-time solutions; they are not included in the base for calculating the property tax limit in future years.

  5. 5.

    Multiple override attempts on the same ballot are recorded as separate overrides. Override attempts and successes are recorded by the year of the vote. Successful overrides begin in the following fiscal year.

  6. 6.

    The data are accessible at https://www.mass.gov/municipal-databank-data-analytics-including-cherry-sheets.

  7. 7.

    Although the figures in “Appendix 1” show evidence of jumps at the cutoff for mean and median household incomes the jumps are merely marginal in a statistical sense because the confidence interval on each side almost overlaps at the cutoff. To further alleviate concern about the potential endogeneity caused by household income, the sensitivity analysis in the empirical section checks the robustness of the findings by entering the pretreatment covariates, including mean and median household income, in the regressions. The results and conclusions remain the same.

  8. 8.

    The results remain similar when choosing different polynomials for the override vote share (e.g.,\(g\) = 1, 3, or 4) in the RDD model. The sensitivity analyses in the empirical results section briefly discuss those results.

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Acknowledgements

The author thanks Dr. William F. Shughart II and the anonymous referees for their helpful comments and suggestions to revise the article and thanks Andrew Sullivan for his suggestions to edit the article’s language. This research is supported by the New Teacher Initiation Research Fund of Renmin University of China (project No.: 20XNF005).

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Appendices

Appendix 1

See Fig. 4

Fig. 4
figure4

Linear fits of pretreatment covariates. Note: Graphs show the linear fits of the socioeconomic, demographic, fiscal, and political pretreatment covariates on both sides of the cutoff. Data are collected from the Municipal Databank of Division of Local Services of the Massachusetts Department of Revenue

Appendix 2

See Fig. 5

Fig. 5
figure5

Quadratic polynomial fits of pretreatment covariates. Note: Graphs show the quadratic polynomial fits of the socioeconomic, demographic, fiscal, and political pretreatment covariates on both sides of the cutoff. Data are collected from the Municipal Databank of Division of Local Services of the Massachusetts Department of Revenue

Appendix 3

See Table 5.

Table 5 Placebo test setting the fake cutoff at one-third of the vote share

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Wei, W. State fiscal constraint and local overrides: a regression discontinuity design estimation of the fiscal effects. Public Choice 189, 347–373 (2021). https://doi.org/10.1007/s11127-021-00889-8

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Keywords

  • Bureaucracy models
  • Property tax limit override
  • Regression discontinuity design
  • Fiscal effects

JEL Classification

  • H20
  • H71
  • H72