Journal of Real Estate Finance and Economics, 25:1, 67±79, 2002
# 2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
On Property Tax Coordination
Department of Economics, Chinese University of Hong Kong, Shatin, Hong Kong
EDEN S. H. YU
Department of Economics andFinance, City University of Hong Kong, Kowloon, Hong Kong
This paper examines the welfare effects of inter-jurisdictional coordination of property taxes. Coordination in
terms of compression, harmonization and radial changes of tax structure is considered. It is found that property
tax coordination via uniform radial adjustments of taxes is in general welfare-superior to the other two types of
tax changes. However, when there is a large disparity of initial tax rates between jurisdictions, harmonization of
property taxes may lead to a larger welfare improvement.
Key Words: property tax, policy coordination, welfare
For many countries, property tax is one of the major sources for local government revenue,
and the revenue is primarily collected for ®nancing the provision of public services. For
example, property tax revenue in virtually every state in the United States is used for
®nancing public education. The 1993 ballot on a property tax limitation in the state of
Oregon (Measure 5) and similar tax ceilings in other states have jeopardized the funding
for their local education systems.
As property taxes affect the provision of public
services, the consequent impact on welfare merits a rigorous examination.
In this paper, we examine the effects of property taxes on housing prices and economic
welfare with a focus on the provision of local public services. Following the public ®nance
literature on tax incidence (Batra, 1975; Batra and Beladi, 1993) and tax competition
(Wilson, 1986), we adopt a general-equilibrium model depicting an economy with two
jurisdictions in which labor is perfectly mobile.
Government in each jurisdiction collects
property taxes to ®nance local public services; inter-jurisdictional tax competition results
from an attempt to attract more households.
In the literature of local public ®nance, there are two contrasting views on tax
competition. The ®rst view, put forward by Tiebout (1956), argues that tax competition
leads to an ef®cient provision of local public goods, when individual households are
mobile among jurisdictions. This view is echoed by Brennan and Buchanan (1980), who
contend that tax competition can effectively restrict the taxing power and desire of a local
government, and hence competition promotes welfare. An alternative view is presented by