Effects of the Form of Government and Property Tax Limits on Local Finance in the Context of Revenue and Expenditure Simultaneity

Abstract

This paper examines the impact of the form of government and state‐imposed property tax limits on municipal finance. We suggest that municipal revenues and expenditures are determined concurrently and estimate revenue and expenditure functions as simultaneous equations. We use the instrumental variable approach and fixed effects to address revenue and expenditure endogeneity. By testing the model on a cross‐section of rich municipal data for fiscal year 2002, we find evidence that revenues and expenditures are simultaneously determined, that potentially binding state‐imposed property tax limits effectively restrict local revenues and that the form of government is a significant predictor of local expenditures.

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