state and local public finance spring 2014, professor yinger lecture 3 voting

State and Local Public FinanceSpring 2014, Professor Yinger

Lecture 3

Voting

State and Local Public FinanceLecture 3: Voting

Class Outline

The Median Voter Model How does it link voting and

demand? Why it is useful? What are its limitations?

Property Tax Limitations What are they? How do they shed light on voting?


In most cases, citizens cannot directly express their demand for local public services.

So they express their demand through their voting, either for public officials or on referenda.

In this class, we explore how an understanding of demand helps us understand the choices local governments make.


The median voter always votes on the winning side.

Line voters up by the strength of their preference for public services.

Identify the voter in the middle—the median voter.

A majority vote must include the median voter.

--------------------M--------------------weakest strongest

preference preference


But voters do not line up, so the median voter is not identified!

The median voter model shows how to identify the median voter assuming preferences are driven by demand factors.

The median voter has the median income and the median tax price.

This model places certain restrictions on preferences.

This model assumes political institutions are neutral.


The Median Voter Model

TP = MC

D = MB

SS*

$


The median voter model is widely used because:

It explains community decisions based the demand function for a single voter—the median voter.

It makes use of widely available data at the community level: spending (or performance), median income, median tax price (median divided by mean house value).

It works!


Example: Duncombe & Yinger, National Tax Journal, 1998

1991 data for 630 school districts in from New York State

Service quality measured by an index of high school exams and drop-out rates

Income elasticity = 0.38 (based on median income)

Price elasticity = -0.24 (based on median tax price)

Significant preference variables include occupation mix, share of housing that is owner-occupied.


In some cases, preference assumptions matter.

Consider two communities with a high demand for education, one (City A) with a good private school and the other (City B) without.

In City A, the high demand for education may not show up as a high demand for public education.

In this case, which is extreme, the median voter model breaks down.


Scholars disagree about the importance of institutions.

Some scholars believe institutions are fairly neutral in most cases, particularly outside large cities.

Other scholars believe bureaucrats can have a large impact on spending and service quality—the leviathan view.

In some cases, it is possible to control for institutions, such as whether a city as a mayor or a city manager.


The Case of Tax Limits

Tax limits challenge the median voter model: Why do voters need to limit taxes if they control spending anyway?

Some scholars believe that most tax limits make a political point with little impact on spending.

Others believe that tax limits reveal voters’ belief in leviathan—and their desire to reign in bureaucrats.


The evidence for the U.S. as a whole leads to four conclusions.

First, property tax limits shift the tax burden away from property taxes to other revenue sources.

This shift was very large right after Proposition 13 in CA and Proposition 2 ½ in MA.

But the shift has moderated since then.


Second, strong tax and expenditure limits (TELs) limit but do not stop the growth in state government revenue.

A large share of this effect comes from a drop in state aid to local governments

And hence involves a higher burden on local tax sources.

The magnitude of these impacts depends on the design of the limit (see Professor Kioko’s article).


Third, there is no compelling evidence that TELs have boosted the efficiency of state and local governments.

States with strong TELs have experienced a decline in the quality of public services.

The performance by California’s students on national tests has dropped significantly, for example, since Proposition 13.


Fourth, voter demand factors still matter even with strong TELs.

California has severe limits.

But Duncombe and Yinger (2011) find that voters with higher incomes or lower tax prices still pick higher school quality

Through active monitoring of school officials or the use of secondary revenue sources, such as parcel taxes or private foundations.


The New Tax Cap in NY

Last year Governor Cuomo proposed and the legislature passed a cap on tax levy increases for all local governments.

The cap is the lesser of 2% and inflation, with exceptions.

The cap exempts new construction (to preserve incentives for development and growth).


The New Tax Cap in NY, 2

The legislation allows jurisdictions to override the cap with a 60% vote.

A survey by the NY Comptroller finds that 179 of 747 local governments passed overrides for 2012.

Also, 29 of the roughly 680 school districts passed overrides (and 19 tried but failed).



Nobody should expect this cap to make local governments more efficient.

Without more state aid (unlikely) or many overrides (more likely, at least in the long run) this cap will cut local services.



This cap is likely to increase disparities across jurisdictions in education and other public services.

Richer school districts are more likely to override the cap.

Poorer school districts need larger percentage increases in revenue just to keep up with richer districts.



Some wealthy districts raise $30,000 in property taxes per pupil; Buffalo, Rochester, and Syracuse (the Upstate Big 3) raise $3,700.

In 20 years, the allowable annual revenue will go up by $30,000×[(1.02)20 – 1]=$14,578 in these rich districts,

But by only $3,700×[(1.02)20 – 1] = $1,798 in the Upstate Big 3.

state and local public finance spring 2014, professor yinger lecture 3 voting

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