property tax exemptions and local fiscal stress** · 2019. 4. 23. · for some purposes, the yield...

PROPERTY TAX EXEMPTIONS AND LOCAL FISCAL STRESS**

JOHN K. MULLEN*

ABSTRACT issue for a largely exhaustive sample of

This study examines the relationship municipamies in New York STEN; such

between property tax exemptions and mu- an analysis is essential in formulating ef-

nicipal fiscal burdens. Besides being one fective public policies in this specific case,

offew comprehensive investigations of thisbut is of broader interest given the pau-

issue, this research is novel in two aspectscity of research in this area.

of its design. First, a multi-jurisdictionalSection two of this paper defines the

approach is employed to be reflective of the problem and briefly discusses its specific

numerous local jurisdictions having tax- nature in New York. Section three de-

levying authority over specific parcels. scribes the methodology and data sources.

Second, a model, which measures local The empirical results of this study are

fiscal burdens, is developed in consider- presented and discussed in section four,and a final section draws some conclu-

ation of the influence of demand and costvariations on t= effort. The model is tested

,,on,, and policy implications.

on two large samples, each representingone of the distinct jurisdictional profile II. Problem Definitionclasses that exhaust the geo-political land- Numerous justifications have been ad-scape of municipalities (except for cities) vanced for granting tax exemptions onwithin New York State. The findings re- both public and private property.' Econ-veal the importance of a number of factors omists have long recognized that thesehypothesized as contributing to local fiscal subsidies often create locational distor-pressures. In particular, the influence of tions and tend to encourage inefficient usebroad categories of property tax exemp- of land-based inputs. Furthermore, thesetions on tax and fiscal burdens is discern- subsidies are likely to have undesirableible. equity consequences. Depending on shift-

ing possibilities, exemptions may in-I. Introduction crease the regressivity of the property tax.

HE growth of property tax exemp-Burdens may fall disproportionately on

Ttions has caused public scrutiny to fo-certain ownership groups (e.g., residen-

cus on the practice of granting these sub-tial users) that are less likely to qualifyfor abatements. Although it is common for

sidies in order to achieve specific outcomes states to adopt tax relief measures [seeand appease certain constituencies. Char- Ebel and Ortbal, 19891, these strategiesitable, religious, and educational institu- are appropriately viewed as both a causetions frequently are singled out for fail- and a result of exemption growth. Fi-ure to pay taxes in accordance with either nal-ly, inter-jurisdictional equity prob-their property values or the benefits they lems may arise when geographically con-receive. These concerns could be height- centrated, exempt activities distributeened if recent federal policies lead to an benefits in a more spatially uniform man-even greater reliance on local property ner. This phenomenon imposes dispropor-taxes. Continued growth in real per cap- tionate burdens on property owners in ju-ita property tax revenues is likely to pres- risdictions containing relatively highsure authorities to alleviate fiscal stress, proportions of exempt to taxable propertyand exemption policies could figure prom- value.inently in these efforts. To date, there ex- Fiscal pressures will likely be more se-ists little evidence concerning the impact vere in those communities with high con-of property tax abatements on local fiscal centrafi@ons of exempt property; however,burdens. We systematically examine this a prevailing view maintains that local

*Clarkson University, Potsdam, NY 13699. government fiscal problems cannot be

467

468 NATIONAL TAX JOURNAL [Vol. XLIII

generally attributed to the growth of ex- ments within the state.' In fact, fiscal im-emptions.' Yet, considerable uncertainty pacts may be greater here because ex-on this issue remains. Research efforts empt property tends to be more unevenlyhave been limited by data reliawity distributed among smaller municipalitiesproblems stemming from both the nature and local governments than in larger cit-of the property tax and the absence of a ies (Pfister, 1976; Property Tax Commit-need to accurately assess wholly-exempt tee of the National Tax Association, 1973).property. Analyses based on tax rates may Towns and villages in the state displayprove illusory if local jurisdictions reduce enormous diversity in terms of populationservice levels as their tax bases are eroded size and character.' These jurisdictionsby exemptions. Comprehensive indicators have absorbed a disproportionate share ofof fiscal performance and improved data recent exemption growth-the number ofsources are needed to more accuratelv as- exempt parcels in these areas increasedsess the impacts of exemptions. by 35 percent between 1982 and 1987

Ideally, data sources should distinguish (versus a 17 percent growth rate in cit-between categories of exempt property ies).because of their likely differential effects.Governmental, educational and eleemos- 111. Measuring Municipal Fiscalynary property typically is wholly exempt Burdensfrom taxation. Such property is the mostlikely source of inter-jurisdictional ineq- Although the fiscal condition of govern-uities because it tends to be geographi- ments may be assessed in a variety ofcally concentrated and is largely immune ways, none is universally accepted. Re-from local discretion in granting exempt gardless, it is possible to develop a mean-status .3 (The possibility remains that pos- ingful burden index which circumvents theitive net benefits accrue from having high major criticisms levelled at traditionalconcentrations of wholly-exempt value if barometers of fiscal performance. Finan-this property is sufficiently stimulative of cial indicators alone may be relied uponeconomic activity.) Alternatively, it is to gauge the fiscal position of municipal-common for municipalities to have some ities. A simple comparison of surplus/def-discretion in allowing partial exemptions. icit positions or financial ratios (such asThese exemptions are typically autho- total debt per capita or short-term debt torized for various residential owners (e.g., revenues) may be conducted. The obviousthe elderly or veterans), but are occasion- problem with financial indicators is thatally extended for commercial/industrial they may be more reflective of isolateduses. The size and composition of exempt conditions at specific points in time, ratherproperty value will determine actual fis- than being comprehensive measures ofcal impacts. In New York, wholly-exempt fiscal well-being. In fact, this is the credit-properties accounted for 78 percent of the rating agency rationale for the use of gen-total statewide exempt value in 1986. Al- eral measures of economic conditions inthough these exemptions are the most order to augment financial ratios in as-likely source of burdens on other property sessing the default risk of state and localowners in the form of higher tax rates and/ governments [Benson, et al., 19881.or lower public service levels, it is con- Frequently, a tax effort index is reliedceivable that partial exemptions may be upon as an indicator of fiscal health. Anan additional stressor. The present anal- increase in this index, defined as the ratioysis distinguishes- between partiallyex- of tax collections.-to tax capacity, r4ectsempt and wholly-exempt property value a greater financial strain on the govern-in order to test for differential impacts." mental unit because of either a shrinkage

The present study focuses on towns and in capacity or an attempt to extract morevillages in New York State (NYS); these revenue from the same base. One flaw ofjurisdictions rely extensively on the prop- this measure lies in the arbitrary defini-erty tax, and likely suffer adverse effects tion of capacity, Capacity, ideally, shouldfrom the existing system of tax abate- be defined as a broad measure of the rev-

No. 41 PROPERTY TAX EXEMPTIONS 469

enue-generating capabilities of the juris- mental unit, each of which has taxingdiction, rather than being based solely on authority over a specific parcel. Realthe typically more narrow, current tax property is classified as belonging to onebase. This is the rationale for the devel- of two municipality classes, depending onopment of the representative tax system whether the property is located in a "vil-as an alternative measure of fiscal capac- lage" area or a "town outside village" area.ity and performance (U.S. Advisory Com- Enept for property located within citymission on Intergovernmental Relations, boundaries, these two areas exhaust the1982). Aronson and Hilley (1986) note that, geographic landscape within the state.for some purposes, the yield from such a Consistent with conventional practice,representative tax system may be a bet- property tax capacity is defined here aster indicator of capacity. Auten (1974) the full value of taxable propert y.7 Be-draws upon this same general concept in cause numerous jurisdictions have taxingutilizing statistical estimates of local fis- authority over individual properties, acal capacity based on median family in- weighted average tax rate is the appro-@ome and property wealth. To make inter- priate measure of traditional tax effort.jurisdictional comparisons valid, burden The tax effort index for a specific area imeasures based on tax effort must "stan- (WATR,) is amended to create a burdendardize" the tax base, unless an identical measure reflecting inter-jurisdictionalsingle-revenue source is relied upon by the variations in capacity and cost conditions.governmental units. This procedure is broadly outlined below,

An additional problem with the tax ef- with additional details provided in Ap-fort index is that it includes "volitional" pendix A.revenues which reflect jurisdictional pref- The "standardized capacity" tax rateerences for public spending. Although (STCAPTK.) for a specific village (VIL) orburden measures should account for vari- town outside village (TOV) area is de-ations in the cost component of providing fined as that rate which would generateessential public services, disentangling an area's total tax collections if it pos-"taste" factors from "need" factors re- sessed the statewide (per capita) medianmains a difficult task. We employ an al- capacity. In a similar fashion, the "stan-ternative burden measure which is par- dardized revenue" tax rate (STREVTR,.)tially based on, but designed to mitigate represents the rate necessary to yield thethe conceptual problems of, the tradi- statewide median revenue (per capita)tional tax effort index. This burden mea- given its actual capacity. Finally, the rep-sure, however, also must fully account for resentative tax rate (RWATR) for a mu-the structure of local government. nicipality class is defined as the rate nec-

For the purposes of measuring burdens, essary to generate the median revenueit is meaningless to concentrate on a sin- yield at the median capacity. Thus, thegle layer of government. Consider that difference between WATR,- and RWATRproperty owners within NYS villages en- must be attributed to differences in eithercounter four separate tax-levying juris- capacity or expenditures. By making andictions, even if special districts are ig- adjustment for local spending variationsnored. In a more complicated scenario, (where this factor ADJI = WATRI -residents of the same village may face tax STREVTR,), we derive a relative measurelevies from multiple towns, school dis- of fiscal burden:tricts, and even counties. Although theproblem of overlapping may become se- BURDENI = (WATP, - RWATRrious enough so that certain jurisdictions - ADJi)/RWATR. (1)must be dropped from any subsequentanalysis, it is generally possible to ac- By substituting for ADJI in (1), we have:count for the tax liabilities incurred in allrelevant jurisdictions. A "tax-levying/ju- BURDENI = (STREVTI@. - RWATR)risdictional proflle" is created by sum-ming the separate levies of each govem- RWATR. (2)

470 NATIONAL TAX JOURNAL [Vol. XLHI

This formulation has a strong intuitive data are for the fiscal year ending in 1987.interpretation because it measures the Data pertaining to exempt values, how-percentage difference between the repre- ever, are taken from FY 1986 because ofsentative tax rate and that which would the nature of the budgetary process,generate "standardized revenue" for the whereby budgets and tax rates are basedarea. Alternatively, a theoretical (and on property tax rolls for the previous year.)mathematical) equivalent to this burdenmeasure can be formulated as: IV. Estimation and Findings

BURDENI = (WATR, - STCAPTR,) We attempt to explain variations in ameasure of fiscal stress (BURDEN) in or-

STCAPTR,. (3) der to assess the contributory role of taxexemptions. Although the empirical in-

This perspective shows that BURDENI vestigation is extended to the traditionalcaptures the percentage change in the measure (WATR) for comparative pur-"standardized capacity" tax rate due to poses, this discussion is limited. Thedeviations from median property wealth. regression model is formulated on the ba-Thus, the influence of local spending sis of both theoretical expectations and advariations has been purged from this hoc considerations. Variable definitions aremeasure. provided in Appendix B.

An additional refinement is made to The basic model to be estimated is:control for variations in the local costcomponent of providing essential public BURDEN = so + A,WHOLEXservices. Revenue/expenditure needs un- + a2PARTEX + a3GRANTSderstandably will be greater in thosecommunities facing high factor prices or + a4OTHREV + a5GENGOVother constraints in the production of mu- + arCAPAC + a7POP + a8POPSQnicipal services. Thus, an ideal burdenmeasure should retain some portion of lo- + agINC + e (4)cal spending variations. (The inherentdifficulty of separating demand from cost The first two variables (WHOLEX andinfluences has been noted previously.) To PARTEX) indicate the percentage of totalpartially control for local cost differen- town property value that is comprised oftials, the STREVTRI, STCAPTRI, and wholly-exempt and partially-exemptRWATR are re-defined to represent me- property, respectively. The coefficients forthan values for specific regions of the state both should be positive ff these exemption(rather than statewide values). Accord- categories are a significant source of fis-ingly, local (or at least regional) cost vari- cal stress. Area population (POP) and perations are partially embedded in our bur- capita income (INC), typically included inden measure.' BURDENI now may be expenditure determinant studies as tasteinterpreted as the percentage change from variables, should positively influence mu-the (region-wide) proto-typical tax rate nicipal fiscal bur-dens. However, the pop-arising from an area's capacity deviation ulation variable may capture scale econ-from the (regional) nonn.9 An analysis omies which could lower fiscal burdens.based on this measure will produce more Thus, we include both population and itsreliable results than one based solely on squared value (POPSQ) to test for thetax efttbecauwa@gmd iquenip&have pa@&hty of a non-linear relatioyaswp.'obeen largely eliminated. The data re- Greater tax capacity (CAPAC) shouldquirements for constructing burden mea- lower fiscal stress through the impact ofsures based on this methodology are de- property wealth on traditional tax effort.tailed in Appendix B, together with an Per capita revenues from intergovern-identification of the variables and sources mental grants (GRANTS) are expected toused in the econometric analysis. (Reve- reduce the fiscal burdens associated withnue, expenditure, tax rate, and most other local property taxation. Similarly, non-


property tax revenue (OTHREV)'should ployed for all models, and the estimatingexhibit a negative relationship with technique is ordinary least squares.11BURDEN. Finally, GENGOV is a general Table 1 presents regression results thatexpenditure category which actually re- explain variations in both burden mea-flects administrative expenses associated sures for VIL areas. Although the follow-with the operation of governmental units. ing discussion refers primarily to the ba-As wcb, loxger tMx *@,A u:res her e wgmld del (Eq. 1), its variants also are

"ic '40be indicative of greater bureaucratic inef- br@efti examined.ficiencies which should exacerbate fiscal The findings suggest that the degree ofburdens. exempt property has a significant influ-

We estimate a number of variants of the ence on village fiscal burdens. Bothbasic model to test the sensitivity of the WHOLEX and PARTEX are positive andfindings to the exclusion of certain vari- significant at the 95 percent level in theables. The reported versions are not cho- BURDEN equation. The coefficient valuesen simply on the basis of "best fit!'; rather, of WHOLEX implies that a one-pereent-they represent equations which include age-point increase in wholly-exempt valuevariables that are theoretically important relative to total property value leads to aand display a consistent statistical per- .38 percent increase in tax effort relativeformance. A linear specification is em- to the norin (i.e., the representative tax

TABLE1REGRESSION RESULTS-VILLAGE (VM) An"

Depe@-dent Variable: BLTRDEN WATR

Equation: I ii III I ii III

CONSTANT .2461* .3449* .2776* .0328* .0349* .0322*(2.89) (4.23) (3.32) (24.18) (26.47) (24.13)

WHOLEX .3830* .3334* ------ -.0035 -.0046 ------(2.58) (2.22) (1.49) (1.89)

PARTEX .8279* .9041* ------ -.0129* -.0112 ------(2.16) (2.32) (2.11) (1.78)

EXEMPT ------ ------ .3753* ------ ------ -.0035(2-53) (1.49)

GRANTS -.000030 -.000033 - 000033 .0000046* .0000045* .0000046*(0.33) (0.36) (0-36) (3.13) (2.97) (3.15)

OTHREV -.00053* -.00042* -.00052* -.000016* -.000013* -.000016*(2.44) (1.92) (2.37) (4.54) (3.74) (4.59)

GENGOV .00044 -.00035* .00045 .000016* -.0000015 ooool5*(1.73) (3.03) (1.78) (3.93) (0.81) (3.84)

CAPAC -.0000042* ------ -.0000043* -9.2806.10-1* ---- -9.0232.20-'*(3.48) (3.58) (4.82) (4.68)

POP .000017 '000018 .000015 .0000015* .0000015* oooool6*(1.07) (1.14) (0.92) (6.01) (5.94) (6.25)

POPSQ -1.2646.10-' -1.3732.10-' -1. 1476xlO-' -5.724lx3.0-11* -5.9636xlO-"* -5.9657xlO-"*(1.17) (1.25) (1.07) (3.33) (3.36) (3.47)

INC -.000024* -.000029* -.000023* 2.4592xlO-" 1.2194XlO-' 2.3907xlO-'*(4.76) (6.11) (4.65) (3.08) (1.56) (2.98)

R2 .253 .225 .246 .267 .214 .259P-@atio 12.14* 11.75* 13.22* 13@05* 11.03* 14.17*d.f. 323 324 324 323 324 324

'Numbers @n parentheses are absolute values of the t-statisties; an asterisk (*) indicatessignificance at the 5% level; a blank indicates that a particular variable is omittedfrom the equation.


effort, or RWATR). The parameter value significantly positive in the WATRfor PARTEX suggests that a one-percent- regressions. One explanation for this isage-point increase here would cause a .83 that intergovernmental aid usually ispercent increase in jurisdictional tax ef- targeted at those jurisdictions with greaterfort relative to RWATR. These coeffi- "effore' as conventionally measured by taxcients imply elasticity estimates of .054 rates."' Such aid, however, may not be in-and .041 for WHOLEX and PARTEX, re- stnnnental in actually reducing propertyspectively. " Although consistent with ex- tax burdens. The well-known "flypaper"pectations, these findings are provocative effect of intergovernmental revenues isin that conventional wisdom suggests that likely to be operative here.partial exemptions are relatively unim- The coefficient of GENGOV is positiveportant as a source of fiscal stress; state- and marginally significant in Eq. 1, sug-wide, partially-exempt property consti- gesting that administrative expenditurestuted approximately 19 percent of total impair municipal fiscal health. The pop-exempt value in 1987. Although their rel- ulation variable is positive, and its squaredative importance is likely to vary sub- value (POPSQ) is negative across allstantially across jurisdictions, partial ex- equations in Table 1. Although theseemptions appear to be a widespread source variables are insignificant in theof property tax burdens. BURDEN equations, the findings here

The exemption variables perform alto- suggest that population may exhibit a non-gether differently in the tax effort (WATR) linear relationship with fiscal burdens. Theequations. WHOLEX and PARTEX dis- initial positive impact of population mayplay a negative (but in only one case sta- reflect taste factors, whereas further pop-tistically significant) relationship to this ulation increases may signal a capturingtraditional burden measure. These find- of scale economies.ings lend support to the contention that Finally, per capita income displays atax rates offer an illusory glimpse of the significantly negative relationship withfiscal impacts of exemptions. Jurisdic- BURDEN but a positive one with WATR.tions may not exhibit systematically This result may not be anomalous if high-higher tax rates if they lower spending income jurisdictions have stronger tasteslevels in response to this type of tax base for public spending, ceteris paribus. Al-erosion. Thus it would not be surprising though they will tend to have higher taxto find that tax rates are not systemati- rates, their true fiscal burdens may be lowcally related to measures of exempt prop- in view of their property wealth. This no-erty value. The magnitudes of the rela- tion is reflected in the construction of thetionships here are ignored in view of the BURDEN variable (via the influence ofgenerally insignificant coeiticient values. median property wealth on STREVI'K-) in

The findings for other explanatory the model.variables in the model are generally con- Eq. 2 reports a variant of the basicsistent with hypothesized effects. The ca- model, where CAPAC has been elimi-pacity variable (CAPAC) has a negative nated as a sensitivity test. Although ju-and significant coefficient in all equa- risdictional capacity should influence anytions. This variable most likely serves as meaningful burden measure, both WATRa proxy for tax base composition. Those and BURDEN are explicitly defined incommunities with a larger fraction of capacity terms. The results here stronglycommercial /industrial to residential parallel those from the basic model, withpropmy-value (azdvfts-gmater do"e- oite tift"on. The coefficient of GEMIOVity) may understandably face both lower becomes negative when CAPAC istax rates and fewer fiscal problems." Al- dropped; a very high positive correlationternative non-grant revenue sources (.895) between these variables may ex-(OTHREV) are shown to reduce property plain this statistical artifact. A possibletax burdens regardless of the chosen mea- interpretation is that general administra-sure. The coefficient of GRANTS is insig- tive expenses are more likely to becomenificant in the BURDEN equations but is excessive in property-rich communities.


Eq. 3 reports findings for the model in increase in its tax effort relative to thewhich a single, comprehensive measure nom.)of exemptions replaces WHOLEX and Table 2 reports findings for TOV areas.PARTEX. EXEMPT measures the total These results are all strongly supportive(weighted averge) percentage of town of those findings for the VIL areas.property exempt for various municipal WHOLEX and PARTEX are positive inp-4naWs. A J -theft *cmodol, althowh the latter is onlyGAIA,@

t--h- d s conform to the -,-

Ci( ni-. EXEMPT has athose of Eq, i,- -wi-- the* exem'p@i"o'n van- marginally signi icaable being significantly positive in the positive and significant effect in Eq. 3. AllBURDEN, but unimportant in the WATR, of these exemption variables continue toequation. The coefficient suggests that a perform in an unsystematic fashion in theone-percentage-point increase in EXEMPT WATR equations.would lead to a .375 percent increase in The capacity variable is consistentlyBURDEN. (This further implies a point negative, and its exclusion here has aelasticity estimate of .075. Thus a 10 per- similar effect as before. GRANTS has acent increase in a jurisdictiox@s exempt negative (but still insignificant) coeffi-property value would lead to a .75 percent cient in the BURDEN equations, and it

TABLE 2REGRESSION RESULTS-TOWN OUTSIDE VILLAGE (TOV) AREAS'

Dependent Variable: BURDEN WATR

Equation: I ix III ii III

CONSTANT .4788* .5619* .5039* .0265* .0273* .0270*(4.63) (5.35) (4.96) (29.55) (29.85) (30.62)

WHOLEX .3558* .3341* ----- -.00150 -.00170 -----

(2.62) (2.41) (1.27) (1.41)

PARTEX .4827 .3136 ----- .00477 .00316 -----(1.68) (1.07) (1.92) (1.24)

EXENPT ----- ----- .3176* ----- ----- -.00137(2.40) (1.19)

GRANTS -.00045 -.00046 -.00040 .000011' Ooooii* ooooii*(1.66) (1.66) (1.49) (4.50) (4.33) (4.81)

OTHREV -.000032 .000088 -.000051 -.000022* -.000021* -.000023*(0.12) (0.34) (0.20) (10.09) (9.35) (10.30)

GENGOV -.Ooioi* -.00204* -.ooios* .0000069* -.0000031 .0000059(2.59) (5.61) (2.72) (1.98) (0.98) (1.75)

CAPAC -.0000033* ----- -.0000033* -3.1489.10-'* ------ -3.0536xlO-'*(6.43) (6.37) (7.04) (6.83)

POP .0000076* ooooo8g* .0000079* 7.9065xlO-'* 9.0634xlO-** 8.0758xlO-4*(3.21) (3.65) (3.31) (3.83) (4.28) (3.91)

POPSQ -1.8312.10-l' -2.2198xlO-"* -1.8937xlO-" -1.3038xlO-" -1.6731xlO-" -1.3291XIO-13

(1.82) (2.16) (1.88) (1.49) (1.87) (1.52)

INC -.000027* -.000034' -.000028* 2.6746xlO-'* 2.0664.10-'* 2.4532xlo-7*(3.70) (4.51) (3.89) (4.17) (3.16) (3.86)

.181 .142 .176 .207 162 .20221.3 18.0 23.71 25.2 ii.os' 27.61'F-ratio

6.3*

1.

d.f. 872 873 873 872 873 873

'Numbers in parentheses are absolute values of the t-statisties; an asterisk (*) indicatessignificance at the 5% level; a blank indicates that a particular variable is omittedfrom the equation.


remains positively associated with tax ef- We experimented with a number offort variations. OTHREV retains its neg- variables-that are not reported here. Forative coef!rlcient, but it is insignificant in example, neither outstanding debt nor debtexplaining BURDEN variations; fewer expense exhibited a consistent significantopportunities for exploiting alternative relationship with either burden measure.revenue sources within TOV areas may Expenditures on select functions alsoexplain this latter finding. proved to be an inconclusive source of fis-

The income variable performs as before cal stress. The exclusion of specific vari-in displaying both a negative effect on ables does not imply that they bear noBURDEN and a positive impact on WATR. systematic relationship to property taxSimilarly, POP is positively related to, and burdens; rather, it implies that they didPOPSQ is negatively related to, both bur- not perform well in this empirical exer-den measures. The previous contention cise. In general, coefficient values andregarding population effpcts is strength- significance levels for reported variablesened by the generally higher significance were substantially unaffected by thislevels for these variables in Table 2. One choice.notable difference between results is thatGENGOV is both negative and signifi- V. Summary and Conclusionscant in explaining BURDEN variationshere, although it remains positively as- This study provides evidence that prop-sociated with tax effort. erty tax exemptions are a significant

The size of the relationships between source of fiscal stress for local jurisdic-BURDEN and the exemption variables is tions in NYS. The results suggest that thesmaller in the TOV areas. A one-percent- complete, and also the partial, removal ofage-point increase in wholly-exempt rel- property from the tax base is generallyative to total property value leads to a .36 detrimental to municipal fiscal health inpercent increase in the relative tax effort a manner roughly comparable to a directindex. The coefficient value of PARTEX reduction in capacity. Further, the find-implies that a one-percentage-point in- ings support the contention that the truecrease would cause a .48 percent increase impact of these tax subsidies may bein jurisdictional tax effort relative to the masked by analyses based on traditionalmedian. These coefficients imply elastic- burden measures, such as effecti*e prop-ities of .035 and .026 for Vv'HOLEX and erty tax rates. The credibility of our re-PARTEX, respectively. In Eq. 3, the coef- sults is strengthened by a number of con-ficient of EXEMPT implies an elasticity siderations. The model relies on the moreof .054 (versus .075 in VIL areas). For realistic concept of a "taxing jurisdic-comparative purposes, consider that the tional profile." The burden index devel-elasticity estimate for the capacity vari- oped here obviates an explicit adjustmentable is -.065 and -.056 for the TOV and for demand influence$ which remainVIL areas, respectively. A given percent- embedded in a traditional measure suchage increase in exempt relative to total. as tax effort. Finally, the empirical find-property value has an effect that is quan- ings are very consistent across models andtitatively similar to an equal percentage jurisdictional groupings.reduction in capacity. The results confirming the importance

All of the estimated relationships re- of partially-exempt properties are novel.ported in both tables are statistically sig- Despite their relatively small role, thesenificant. The-,pereeptaLe_of explained exemptions appear to be a general source

'!6n @ aily.

wi e 6Mi;@@f cTir@@aleies. In fe@ct,the egi'fiiates;@tvlt

varl gener is rangtypicalof cross-sectional analyses. Most imply that a given percentage increase in

importantly, the performance of the ex- the degree to which a community is "par-planatory variables is quite robust across tially-exempt" will have an impact on themodels, jurisdictional classes, and burden same order of magnitude as an equivalentmeasures. change in wholly-exempt property. A re-


sultant implication is that localities may property exemption problem may be morebe able to exercise more control over the extensive use of "payments in-lieu ofimpact of exemptions than was previ- taxes"15 programs funded at the state level.ously thought. Because jursidictions often These plans typically entail directingmust choose to allow partial exemptions compensatory payments to local govern-that bAv-e-bep-n-outhorized by s

'tote. law, mt@Rtsbased on exempt prmrty wealth,

they appear to have at least som-e"@Vifit@ although the inherent unreli@bilfty,;t'ex-to influence fiscal impacts arising from empt property data remains a majorthese subsidies. This is not a consider- stumbling block in implementation. Suchation for wholly-exempt parcels for which a program even could be designed to in-local options typically are non-existent. corporate payments for private sector ac-

Additional conclusions are less provoc- tivities viewed as truly "untouchable" andative. Capacity was demonstrated as hav- deserving of full state-mandated exemp-ing an inverse relationship with tax rates tions. Political support may be easier toand fiscal burdens, suggesting that the obtain if these programs are heralded asproperty tax is less onerous in wealthier providing equity adjustments to localitiesjurisdictions or in those with higher pro- burdened with exemptions over which theyportions of commercial/industrial to total have little or no control.property values. The importance of alter- Future research efforts should focus onnative own-source tax revenues is con- the ultimate economic and fiscal impactsfirmed here, but the influence of inter- of alternative private property exemptiongoverrunental grants is more ambiguous. policies. This study demonstrates the im-Specific expenditure categories were found portance of utilizing an alternative to tra-to be largely unrelated to fiscal health, ditional tax effort in analyzing the -fiscalwith the exception of general administra- impacts associated with property taxtive outlays. Not surprisingly, property- abatements. Further methodological re-rich communities are more likely to finements may yield more detailed as-suffer from bureaucratic over-supply or sessments in applications to other state-excessive administrative outlays. local systems.

h is useful to distinguish between pub-lic and private exemptions in drawingbroad policy implications. It may be po- ENDNOTESlitically infeasible to largely dismantle

**The author wishes to thank the Rockefeller In-well-entrenched private exemptions, de- stitute of Government for a Senior Fellowship in sup-spite growing disenchantment with port of this research. This manuscriipt benefittedabatement practices. However, it seems enormously from the suggestions of anonymous ref-pragmatic to allow jurisdictions to exer- erees and the editor of this Journal. I also thank Doncise more control over their own fiscal Dutkowsky, Vincent Munley and Thomas Tyson for

helpful comments. The usual caveat applies.destiny by expanding the use of local op- 'See Quigley and Schmenner (1975) for a thoroughtion exemptions. In NYS, localities cur- discussion of historical justifications for property taxrently decide whether or not to allow par- exemptions.tial exemptions, yet they have no recourse 'For example, see the discussion in Pfister (1976),

P. 442.but to grant complete exemptions for other 'In New York, three-quarters of the allowable ex-classes of private property. Despite nu- emptions are state-mandated rather than local op-merous practical difficulties, allowing jU- tion. In 1986, these mandated exemptions repre-risdictions to select their own local ex- sented 86% of total exempt value in the state. (This

and other figures describing the value of exemptionsemptions would enable them to alter the are obtained ftom: NYS Board of Equalization anddirect fiscal impacts of these policies. Of Assessment, February 1988, and previous years.)course, the long-term economic and finan- 'This distinction is justified on the basis of the dif-cial consequences of these choices, though ferential nature of partial vs. full exemptions in NYS:

the former are extended primarily to private propertynot yet fully understood, would have to be owners (94% of partially-exenipt value in 1986 wasgiven appropriate consideration. pnvately-owned) at the discretion of local officials; the

The most logical response to the public latter are mandated without localdiscretionfor gov-


ernment and not-for-profit property (public sector generally available. Thus, we are unable to directlyholdings represented 80% of wholly-exempt value in test the effect of composition on fiscal burdens.1986). 14The potential for simultaneous equation bias is

'Cities within the state have different revenue recognized in the WATR equations.structures and institutional arrangements than towns ""rhe federal government has an extensive, thoughand villages; accordingly, they are not considered in uncoordinated, system of "payments in-lieu of taxes"the present study. to state and local governments; see ACIR (1981), pp.

'Towns and villages in the state may have a rural, 33-43 for a description. At least three states (Wis-suburban, or even urban character. In the sample, consin, New Jersey & Connecticut) have initiatedpopulation sizes average 7520 and 2281 for the towns '@pilot" programs to relieve the fiscal pressures on theirand villages, respectively; the largest towns and vil- localities with extensive holdings of exempt proper-lages have populations exceeding 300,000 and 21,000, ties. See Rosner (1986) for a discussion of recent trends.respectively.

'Capacity is defined solely in terms of propertywealth because we are concerned with the ability of REFERENCESproperty tax-dependent jurisdictions to raise revenuefrom this source alone (and how their ability to raise Aronson, J. Richard and J. L. Hilley, Financing Staterevenue is subsequently impacted by exemptions). and Local Governments (4th ed.), The Brookings In-These jurisdictions rely almost entirely on the prop- stitution, Wash., D.C., 1986.erty tax as their source of own tax revenue, although Auten, Gerald E., "The Distribution of Revenue-they typically receive some revenue from the county Sharing Funds and IkW Public Expenditure Needs,"portion of the state sales tax levy. Thus, it makes lit- Public Finance Quarterly, Vol. 2, No. 3, July 1974,tle sense to more broadly define capacity here in light pp 352-375.of current legal and institutional arrangen@ents. Benson, Earl D., B. R. Marks, and K. K. Raman, "Tax

8Demand factors will not be reflected in BURDEN Effort as an Indicator of Fiscal Stress," Public Fi-unless they vary systematically with cost factors. We nance Quarterly, Vol. 16, No. 2, April 1988, pp. 203-argue that cost conditions are more likely to display 218.a pronounced systematic pattern across the diverse Ebel, Robert D. and James Ortbal, "Direct Residen-regions of the state than demand forces. Although tial Property Tax Relief," Intergovernmental Per-"taste" factors will undoubtedly exhibit locational spective, Vol. 15, No. 2, Spring 1989, pp. 9-14.variations, they may be influenced more by type of Fastrup, Jerry C., "Fiscal Capacity, Fiscal Equaliza-location (e.g., urban versus rural versus suburban) than tion and Federal Grant Formulas," in Federal-State-by geographic location per se. The geographic regions Local Fiscal Relations, Technical Papers, Vol. 1, U.S.employed here conforin to the ten distinct "economic Department of the Treasury (Office of State and Lo-development regions" as defined by the NYS Depart- cal Finance), USGPO, Wash., D.C., Sept. 1986, pp.ment of Economic Development. 41-62.

'For comparative purposes, the analysis is con- Gold, Steven D., Property Tax Relief D.C. Heath &ducted without regional standardization, i.e., by re- Co., Lexington, MA, 1979.lying on statewide values in defining RWATR, etc. Hattery, M. R., et al., Services Provided by Local Gov-These results (not reported here) are mutually sup- emments in NYS, Special Report of the NYS Leg-portive of those based on regional standardization, al- idative Commission on State-Local Relations, Dept.though differences in magnitudes exist. The region- of Agricultural Economics, Cornell Univ., March 30,ally standardized results will more accurately reflect 1987.fiscal burdens if cost conditions are more systemati- Howell, James M. and C. F. Stamm, Urban Fiscalcally linked to geographic patterns than are demand Stress (A Comparative Analysis of 66 U.S. Cities),influences. D.C. Heath & Co., Lexington, MA, 1979.

'O'Mii; approach was suggested by an anonymous Mullen, J. K., "The Impact of Property Tax Exemp-referee. tions on Municipal Fiscal Burdens," working paper,

"Although expenditure-determinant equations are Rockefeller Institute of Government, Albany, N.Y.,often estimated via a log-log specification, there is no Oct. 1989.theoretical basis for doing this here. Because the tra- New York State Legislative Institute (Economic Re-ditional burden measure (WATR) is a ratio, there are search Service, Baruch College), "The Problem ofinherent difficulties with OLS estimation. However, Real Property Tax Exemptions: Legislative Op-because these problems become much less severe with tions," March 1977.larger sample sizes, we opt to remain with OLS rather New York State, Office of the State Comptroller (Bu-than employ techniques developed explicitly to deal reau of Municipal Research and Statistics), Overallwith limited dependent variables. Real Property T= Rates (local governments in NYS),

"Recall that BURDEN is defined as the percentage fiscal year ended in 1987, Albany, N.Y., 1988.change,fmm the-rwrewiitatve tax rate, whereas the -, SPWWRIPDrt On Mu-qXd Aff-. fiscal yearexemption variables are measured as percentge lev- ended in 1987, Albany, N.Y., April 1988.els. The elasticity estimates reported here are caku- -, Local Governments and Their Use of Saleslated at the median and are reflective of the percent- T=es in NYS, Albany, N.Y., Sept. 1988.age change from the representative tax rate (i.e., the -, Municipal Code Manual, Albany, N.Y., De-absolute change in BURDEN) due to a given per- cember 1987.centage change in any of the explanatory variables. -, unpublished data on village school districts,

"Unfortunately, data detailing the composition of made available in Spring 1989.the property tax base below the county level is not New York State, Board of Equalization and Assess-


ment, Exemptwns from Real Property Taxatton in wheretrii = the ad valorem (full value) taxIVYS: 1986 County, City, and Town Assessment rate for one of j = 1 through nRolls, Vol. 1, Albany, N.Y. February 1988. tax-levying jurisdictions within

-, New York State Propeny Value Trends Byarea i;*

Class, 1974-1983, Albany, N.Y., April 1988.Vi@= the full value of taxable prop-

Obern, Catheryn C., Fiscal Stress in New York StateCounties, Ph.D. tbesis (Cor4eU University, 1987),

erty as assessed by one ofj tax-

University Microfilms, Ann Arbor, MI, 1987. levying jurisdictions; and

Pfister, Richard L., "A Re-evaluation of the Justifi- wji= a weight reflecting that fraction

cations for Property Tax Exemption," Public Fi- of total tax levies within i aris-nance Quarterly, Vol. 4, No. 4, Oct. 1976, pp. 431- ing from the levy of j.452.

Property Taxation Committee of the National Tax The median per capita capacity is calculatedAssociation, "The Erosion of the Ad Valorem Real for the separate municipality classes (VIL andEstate Tax Base," Tax Policy, Vol. 40, No. 1, (1973), TOV). This allows for a definition of the

Itstan-

pp. 1-94. dardized capacity" tax rate as:Quigley, J. M. and R. W. Schmenner, "Property Tax

Exemption and Public Policy," Public Policy, Vol.23, No. 3, Summer 1975, pp. 259-297.

1 (CAP*POP,) (A2)Rafiise, Robert W., "A Representative Expenditure STCAPTF@ tri,v,

Approach to the Cost of the Service Responsibilitiesof Sta:tes," in Federal-State-Local Fiscal Relations, where CAP is the median capacity, POP, is theTechnical Papers, Vol. 1, U.S. Department of the

areaIs population, and the term in the nunier-

Treasury (Office of State and Local Finance),USGPO, Wash., D.C., Sept. 1986, pp. 133-186. ator is that arews total (multi-jurisdictional)

Rockefeller Institute of Government (SUNY), 1986- revenue yield. Also, we compute the "stan-

87 New York State Statistical Yearbook (13th edi- dardized revenue" tax rate as:tion), Albany, N.Y., July 1987.

Rosner, Monroe H., "In-Lieu-Of-Tax Payments by Ex-empt Organizations: Issues, Trends and Innova- STREVTP, = (RPC*POP,) W4 1 (A3)E 'V@tions," NTA-TIA 1986 Annual Proceedings, pp. 104-109.

Texas Advisory Commission on Intergovernmental where RPC is the median revenue per capita,

Relations, "Local Government Fiscal Capacity and the term in the denominator is the area'sMeasures: A Profile of State Studies," in Federal- weighted-average taxable property value. AState-Local Fiscal Relations, Technical Papers, Vol. weighted average is appropriate here (and also1, U.S. Department of the Treasury (Office of State in Al) because the distinct taxing jurisdic-and Imal Finance), USGPO, Wash., D.C., Sept. 1986,

tions, via their decisions to allow/disallow lo-pp.263-295.

U.S. Advisory Commission on Intergovernmental Re- cal option exemptions, typically do not rely on

lations, City Financial Emergencies: The Intergov- the same definition of taxable value.

ernmental Dimension, Report No. A-42, USGPO, As noted, differences between WATR andWash

.D.C., July 1973. RWATR are due to capacity and/or spending

-, @a@ments in-Lieu of Taxes on Federal Real deviations from the median. This may be seenProperty, Report No. A-90, USGPO, Wash., D.C., alternatively as:Sept. 1981.

-, Tax Capacity of the Fifty States. Methodology WATR, - RWATR = (STREVTR, - RWATR)and Estimates, Report No. M-134, USGPO, Wash.,D.C., March 1982. + (STCAPTK - RWATR). (A4)

U.S. Department of Commerce (Bureau of the Cen-sus), Northeast. 1986 Population and 1985 Pe, Cap-

Because of computational ease, BURDENI isita Income Estimates for Counties and IncorporatedPlaces, Current Population Reports, Series P-26, No. calculated by relying on estimates of WATK

86-NE-SC, USGPO, Wash., D.C., March 1988 and STCAPI'K as in (3). It should be noted thatthe theoretical equivalent measure in (2) yields

Appendix A-Construction of WATR identical values for BURDENI.

and BURDEN Measures of FiscalStress

*The calculation of WATRs for the TOV areas in-The weighted average tax rate on property volves summing over three separate taxing juris&c-

within a specific village (VIL) or "town outside tions: county, town, and school district. Tax levies based

village" (TOV) area is defined as: on property values determined to be taxable for vil-lage purposes represent the additional layer of gov-ernment within VIL areas. The myriad of tax-levying

WATR, tr,,vi Wi i (Al)special districts are not considered here, but their mnarrelative-revenue importance justifies their exclusion.

478 NATIONAL TAX JOURNAL [Vol. XLHI

Appendix B-Data Requirements, ties, towns, school districts, and villages. DataSources and Variable Definitions on assessed value, exempt value, and equali-

zation rates are provided by the NYS Board ofBurden measures are generated for the ma- Equalization and Assessment's Exemptwns from

jority of VIL and TOV areas within the state. Real Property Taxation in NYS (Feb. 1988).Substantial jurisdictional overlapping creates These data detail the value of exemptions fromdata disaggregation problems that cannot be property taxation (for town, school district, ando@ercome in some cases. Nevertheless, we de- county purposes) for entire towns. It is not pos-nve a sample of 333 village areas and 882 TOV sible to separate the value of exemptions in theareas (out of a possible 558 and 932, respee- VIL versus TOV portions of a given tovai; fur-tively). The calculation of WATR for VIL areas ther, the exempt value for village purposes isis described below. [See Mullen (1989) for a more unavailable given current state legislation re-detailed illustration of this procedure and a de- garding financial reporting requirements forscription of exclusion criteria in building the thee jurisdictions. It is possible, however, tosample.] calculate the weighted average percentage of

For a specific VIL area, tax effort is calcu- town property exempt from taxation for var-lated following (Al) as: ious (other than village) jurisdictional pur-

poses; also, that fraction of total town property

WA value which is wholly and partially exempt isWATK trlvl, /E lvli discernible. The latter figure is a weighted av-

erage, but the '@)ercentage wholly exempt" isnot because all jurisdictions must allow this type

where all variables are as previously defined of state-mandated exemption.but, more specifically, where Ilti'iV'@

(county tax rate * taxable value,county purposes) + Variable Definitions

(town tax rate * taxable value, [Primary data sources appear intown purposes) + brackets]

(school district tax rate * taxable value,school district purposes) + CAPAC-capacity per capita, defined as the

(village tax rate * taxable value, weighted average value of property divided byvillage purposes). the population [MF, OTRLI

A major difriculty here is that taxable values EXEMPT-weighted average percentage of to-tal town property value exempt for various

for school district purposes within specific vil- purposes [EA]lages generally are not available because theirborders are seldom coterminous with those of GENGOV-general government expendituresschool districts. We assume that the taxable per capita, all tax-levying governments [MFIvalue for school district purposes is equal to that GRANTS-per capita revenues from all inter-for town purposes. [This assumption is tenable governmental grants, sununed over all tax-because of the small deviation among taxable levying governments [NFIvalues for the various jurisdictional purposes.Taxable values are usually assigned by town INC-1985 per capita income, village or totalassessors, and other taxing authorities may town area [CPR]adjust these figures slightly in deciding whether MMV-per capita non-property tax reve-or not to allow the same partial exemptions as nues, summed over all tax-levying govern-the town.] Another problem is that numerous ments [MF]villages "giar6" a town with another village (or PARTEX-partially-exempt property value asvillages). In most cases, it is still possible toapportion relevant values to individual vil- a (weighted average) percentage of total prop-

erty value within the town [EA]lages. Villages located in multiple counties, orcontaining more than one school district, are POP-1980 population, village area only [MFI;excluded from the sample. 1986 population, TOV area only [CPR]

Two primary data sources are utilized. The POPSQ-population variable squaredSpecial Report on Municipal Affairs (NYS, Of-fice of the State Comptroller) provides detailed WHOLEX-wholly-exempt property value asinformation on property tax and other reve- a percentage of total property value within thenues, expenditures, population, etc., for coun- town [EA]


Key for prhnary data sources: EA-Exemptions from Real Property Taxationin IVYS: 1986 County, City, and Town Assess-

OTRL-Overall Tax Rate/Levy File, Overall nwnt Rolls, NYS Board of Equalization andReal Property Tax Rates, NYS Office of the State Assessment, 1988Comptroller, 1988

CPR-U.S. Bureau of the Census, CurrentMF-Spe,cial Report on Municipal Affairs, NYS Population Reports, 1988Office of the State Comptroller, 1988

property tax exemptions and local fiscal stress** · 2019. 4. 23. · for some purposes, the yield...

Documents