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National Tax Journal, Vol. 43, no. 4, (December, 1990), pp. 467-79

PROPERTY

TAX EXEMPTIONS

AND LOCAL FISCAL

STRESS**

JOHN K. MULLEN* ABSTRACT This study examines the relationship between property tax exemptions and municipal fiscal burdens. Besides being one offew comprehensive investigations of this issue, this research is novel in two aspects of its design. First, a multi-jurisdictional approach is employed to be reflective of the numerous local jurisdictions having taxlevying authority over specific parcels. Second, a model, which measures local fiscal burdens, is developed in consideration of the influence of demand and cost variations on t= effort. The model is tested on two large samples, each representing one of the distinct jurisdictional profile classes that exhaust the geo-political landscape of municipalities (except for cities) within New York State. The findings reveal the importance of a number of factors hypothesized as contributing to local fiscal pressures. In particular, the influence of broad categories of property tax exemptions on tax and fiscal burdens is discernible. I. Introduction HE growth of property tax exempTtions has caused public scrutiny to focus on the practice of granting these subsidies in order to achieve specific outcomes and appease certain constituencies. Charitable, religious, and educational institutions frequently are singled out for failure to pay taxes in accordance with either their property values or the benefits they receive. These concerns could be heightened if recent federal policies lead to an even greater reliance on local property taxes. Continued growth in real per capita property tax revenues is likely to pressure authorities to alleviate fiscal stress, and exemption policies could figure prominently in these efforts. To date, there exists little evidence concerning the impact of property tax abatements on local fiscal burdens. We systematically examine this *Clarkson University, Potsdam, NY 13699. 467

issue for a largely exhaustive sample of municipamies in New York STEN; such an analysis is essential in formulating effective public policies in this specific case, but is of broader interest given the paucity of research in this area. Section two of this paper defines the problem and briefly discusses its specific nature in New York. Section three describes the methodology and data sources. The empirical results of this study are presented and discussed in section four, and a final section draws some conclu,,on,, and policy implications. II. Problem

Definition

Numerous justifications have been advanced for granting tax exemptions on both public and private property.' Economists have long recognized that these subsidies often create locational distortions and tend to encourage inefficient use of land-based inputs. Furthermore, these subsidies are likely to have undesirable equity consequences. Depending on shifting possibilities, exemptions may increase the regressivity of the property tax. Burdens may fall disproportionately on certain ownership groups (e.g., residential users) that are less likely to qualify for abatements. Although it is common for states to adopt tax relief measures [see Ebel and Ortbal, 19891, these strategies are appropriately viewed as both a cause and a result of exemption growth. Final-ly, inter-jurisdictional equity problems may arise when geographically concentrated, exempt activities distribute benefits in a more spatially uniform manner. This phenomenon imposes disproportionate burdens on property owners in jurisdictions containing relatively high proportions of exempt to taxable property value. Fiscal pressures will likely be more severe in those communities with high concentrafi@ons of exempt property; however, a prevailing view maintains that local government fiscal problems cannot be

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NATIONAL TAX JOURNAL

generally attributed to the growth of exemptions.' Yet, considerable uncertainty on this issue remains. Research efforts have been limited by data reliawity problems stemming from both the nature of the property tax and the absence of a need to accurately assess wholly-exempt property. Analyses based on tax rates may prove illusory if local jurisdictions reduce service levels as their tax bases are eroded by exemptions. Comprehensive indicators of fiscal performance and improved data sources are needed to more accuratelv assess the impacts of exemptions. Ideally, data sources should distinguish between categories of exempt property because of their likely differential effects. Governmental, educational and eleemosynary property typically is wholly exempt from taxation. Such property is the most likely source of inter-jurisdictional inequities because it tends to be geographically concentrated and is largely immune from local discretion in granting exempt status .3 (The possibility remains that positive net benefits accrue from having high concentrations of wholly-exempt value if this property is sufficiently stimulative of economic activity.) Alternatively, it is common for municipalities to have some discretion in allowing partial exemptions. These exemptions are typically authorized for various residential owners (e.g., the elderly or veterans), but are occasionally extended for commercial/industrial uses. The size and composition of exempt property value will determine actual fiscal impacts. In New York, wholly-exempt properties accounted for 78 percent of the total statewide exempt value in 1986. Although these exemptions are the most likely source of burdens on other property owners in the form of higher tax rates and/ or lower public service levels, it is conceivable that partial exemptions may be an additional stressor. The present analysis distinguishes- between partiallyexempt and wholly-exempt property value in order to test for differential impacts." The present study focuses on towns and villages in New York State (NYS); these jurisdictions rely extensively on the property tax, and likely suffer adverse effects from the existing system of tax abate-

[Vol. XLIII

ments within the state.' In fact, fiscal impacts may be greater here because exempt property tends to be more unevenly distributed among smaller municipalities and local governments than in larger cities (Pfister, 1976; Property Tax Committee of the National Tax Association, 1973). Towns and villages in the state display enormous diversity in terms of population size and character.' These jurisdictions have absorbed a disproportionate share of recent exemption growth-the number of exempt parcels in these areas increased by 35 percent between 1982 and 1987 (versus a 17 percent growth rate in cities). 111. Measuring Municipal Fiscal Burdens Although the fiscal condition of governments may be assessed in a variety of ways, none is universally accepted. Regardless, it is possible to develop a meaningful burden index which circumvents the major criticisms levelled at traditional barometers of fiscal performance. Financial indicators alone may be relied upon to gauge the fiscal position of municipalities. A simple comparison of surplus/deficit positions or financial ratios (such as total debt per capita or short-term debt to revenues) may be conducted. The obvious problem with financial indicators is that they may be more reflective of isolated conditions at specific points in time, rather than being comprehensive measures of fiscal well-being. In fact, this is the creditrating agency rationale for the use of general measures of economic conditions in order to augment financial ratios in assessing the default risk of state and local governments [Benson, et al., 19881. Frequently, a tax effort index is relied upon as an indicator of fiscal health. An increase in this index, defined as the ratio of tax collections.-to tax capacity, r4ects a greater financial strain on the governmental unit because of either a shrinkage in capacity or an attempt to extract more revenue from the same base. One flaw of this measure lies in the arbitrary definition of capacity, Capacity, ideally, should be defined as a broad measure of the rev-

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PROPERTY

TAX EXEMPTIONS

enue-generating capabilities of the jurisdiction, rather than being based solely on the typically more narrow, current tax base. This is the rationale for the development of the representative tax system as an alternative measure of fiscal capacity and performance (U.S. Advisory Commission on Intergovernmental Relations, 1982). Aronson and Hilley (1986) note that, for some purposes, the yield from such a representative tax system may be a better indicator of capacity. Auten (1974) draws upon this same general concept in utilizing statistical estimates of local fiscal capacity based on median family in@ome and property wealth. To make interjurisdictional comparisons valid, burden measures based on tax effort must "standardize" the tax base, unless an identical single-revenue source is relied upon by the governmental units. An additional problem with the tax effort index is that it includes "volitional" revenues which reflect jurisdictional preferences for public spending. Although burden measures should account for variations in the cost component of providing essential public services, disentangling "taste" factors from "need" factors remains a difficult task. We employ an alternative burden measure which is partially based on, but designed to mitigate the conceptual problems of, the traditional tax effort index. This burden measure, however, also must fully account for the structure of local government. For the purposes of measuring burdens, it is meaningless to concentrate on a single layer of government. Consider that property owners within NYS villages encounter four separate tax-levying jurisdictions, even if special districts are ignored. In a more complicated scenario, residents of the same village may face tax levies from multiple towns, school districts, and even counties. Although the problem of overlapping may become serious enough so that certain jurisdictions must be dropped from any subsequent analysis, it is generally possible to account for the tax liabilities incurred in all relevant jurisdictions. A "tax-levying/jurisdictional proflle" is created by summing the separate levies of each govem-

469

mental unit, each of which has taxing authority over a specific parcel. Real property is classified as belonging to one of two municipality classes, depending on whether the property is located in a "village" area or a "town outside village" area. Enept for property located within city boundaries, these two areas exhaust the geographic landscape within the state. Consistent with conventional practice, property tax capacity is defined here as the full value of taxable propert y.7 Because numerous jurisdictions have taxing authority over individual properties, a weighted average tax rate is the appropriate measure of traditional tax effort. The tax effort index for a specific area i (WATR,) is amended to create a burden measure reflecting inter-jurisdictional variations in capacity and cost conditions. This procedure is broadly outlined below, with additional details provided in Appendix A. The "standardized capacity" tax rate (STCAPTK.) for a specific village (VIL) or town outside village (TOV) area is defined as that rate which would generate an area's total tax collections if it possessed the statewide (per capita) median capacity. In a similar fashion, the "standardized revenue" tax rate (STREVTR,.) represents the rate necessary to yield the statewide median revenue (per capita) given its actual capacity. Finally, the representative tax rate (RWATR) for a municipality class is defined as the rate necessary to generate the median revenue yield at the median capacity. Thus, the difference between WATR,- and RWATR must be attributed to differences in either capacity or expenditures. By making an adjustment for local spending variations (where this factor ADJI = WATRI STREVTR,), we derive a relative measure of fiscal burden: BURDENI = (WATP, - RWATR - ADJi)/RWATR. By substituting

(1)

for ADJI in (1), we have:

BURDENI = (STREVTI@. - RWATR) RWATR.

(2)

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NATIONAL TAX JOURNAL

This formulation has a strong intuitive interpretation because it measures the percentage difference between the representative tax rate and that which would generate "standardized revenue" for the area. Alternatively, a theoretical (and mathematical) equivalent to this burden measure can be formulated as:

[Vol. XLHI

data are for the fiscal year ending in 1987. Data pertaining to exempt values, however, are taken from FY 1986 because of the nature of the budgetary process, whereby budgets and tax rates are based on property tax rolls for the previous year.)

IV. Estimation and Findings We attempt to explain variations in a BURDENI = (WATR, - STCAPTR,) measure of fiscal stress (BURDEN) in orSTCAPTR,. (3) der to assess the contributory role of tax exemptions. Although the empirical inThis perspective shows that BURDENI vestigation is extended to the traditional captures the percentage change in the measure (WATR) for comparative pur"standardized capacity" tax rate due to poses, this discussion is limited. The deviations from median property wealth. regression model is formulated on the baThus, the influence of local spending sis of both theoretical expectations and ad variations has been purged from this hoc considerations. Variable definitions are measure. provided in Appendix B. An additional refinement is made to The basic model to be estimated is: control for variations in the local cost BURDEN = so + A,WHOLEX component of providing essential public services. Revenue/expenditure needs un+ a2PARTEX + a3GRANTS derstandably will be greater in those + a4OTHREV + a5GENGOV communities facing high factor prices or other constraints in the production of mu+ arCAPAC + a7POP + a8POPSQ nicipal services. Thus, an ideal burden measure should retain some portion of lo+ agINC + e (4) cal spending variations. (The inherent difficulty of separating demand from cost The first two variables (WHOLEX and influences has been noted previously.) To PARTEX) indicate the percentage of total partially control for local cost differentown property value that is comprised of tials, the STREVTRI, STCAPTRI, and wholly-exempt and partially-exempt RWATR are re-defined to represent me- property, respectively. The coefficients for than 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 fisingly, local (or at least regional) cost varical stress. Area population (POP) and per ations are partially embedded in our burcapita income (INC), typically included in den measure.' BURDENI now may be expenditure determinant studies as taste interpreted as the percentage change from variables, should positively influence muthe (region-wide) proto-typical tax rate nicipal fiscal bur-dens. However, the poparising from an area's capacity deviation ulation variable may capture scale econfrom 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 its reliable results than one based solely on squared value (POPSQ) to test for the tax efttbecauwa@gmd iquenip&have pa@&hty of a non-linear relatioyaswp.'o been largely eliminated. The data re- Greater tax capacity (CAPAC) should quirements for constructing burden mealower fiscal stress through the impact of sures based on this methodology are de- property wealth on traditional tax effort. tailed in Appendix B, together with an Per capita revenues from intergovernidentification of the variables and sources mental grants (GRANTS) are expected to used in the econometric analysis. (Revereduce the fiscal burdens associated with nue, expenditure, tax rate, and most other local property taxation. Similarly, non-

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TAX EXEMPTIONS

property tax revenue (OTHREV)'should exhibit a negative relationship with BURDEN. Finally, GENGOV is a general expenditure category which actually reflects administrative expenses associated with the operation of governmental units. As wcb, loxger tMx ,A *@ u:res her e wgmld be indicative of greater bureaucratic inefficiencies which should exacerbate fiscal burdens. We estimate a number of variants of the basic model to test the sensitivity of the findings to the exclusion of certain variables. The reported versions are not chosen simply on the basis of "best fit!'; rather, they represent equations which include variables that are theoretically important and display a consistent statistical performance. A linear specification is em-

471

ployed for all models, and the estimating technique is ordinary least squares.11 Table 1 presents regression results that explain variations in both burden measures for VIL areas. Although the following discussion refers primarily to the badel (Eq. 1), its variants also are "ic '40 examined. br@efti The findings suggest that the degree of exempt property has a significant influence on village fiscal burdens. Both WHOLEX and PARTEX are positive and significant at the 95 percent level in the BURDEN equation. The coefficient value of WHOLEX implies that a one-pereentage-point increase in wholly-exempt value relative to total property value leads to a .38 percent increase in tax effort relative to the norin (i.e., the representative tax

TABLE1 REGRESSION RESULTS-VILLAGE (VM) An" Depe@-dent Equation:

Variable:

BLTRDEN

WATR

I

ii

III

I

ii

III

CONSTANT

.2461* (2.89)

.3449* (4.23)

.2776* (3.32)

.0328* (24.18)

.0349* (26.47)

.0322* (24.13)

WHOLEX

.3830*

.3334*

------

-.0035 (1.49)

-.0046 (1.89)

------

PARTEX

.8279* (2.16)

.9041* (2.32)

------

-.0129* (2.11)

-.0112 (1.78)

EXEMPT

------

------

.3753* (2-53)

------

------

GRANTS

-.000030 (0.33)

-.000033 (0.36)

000033 (0-36)

.0000046* (3.13)

.0000045* (2.97)

OTHREV

-.00053* (2.44)

-.00042* (1.92)

-.00052* (2.37)

-.000016* (4.54)

GENGOV

.00044 (1.73)

-.00035* (3.03)

.00045 (1.78)

.000016* (3.93)

CAPAC

-.0000042* (3.48)

------

-.0000043* (3.58)

-9.2806.10-1* (4.82)

(2.58)

POP

POPSQ

INC

R2 P-@atio d.f.

(2.22)

.000017 (1.07)

'000018 (1.14)

-1.2646.10-' (1.17)

-1.3732.10-' (1.25)

-.000024* (4.76)

-.000029* (6.11)

.253 12.14* 323

'Numbers @n parentheses are significance at the 5% level; from the equation.

.225 11.75* 324 absolute a blank

-

.000015 (0.92) -1. 1476xlO-' (1.07) -.000023* (4.65)

-5.724lx3.0-11* (3.33) 2.4592xlO-" (3.08)

.246 13.22* 324 values

.0000015* (6.01)

.267 13@05* 323

-.000013* (3.74) -.0000015 (0.81) ----

------

-.0035 (1.49) .0000046* (3.15) -.000016* (4.59) ooool5* (3.84) -9.0232.20-'* (4.68)

.0000015* (5.94) -5.9636xlO-"* (3.36) 1.2194XlO-' (1.56)

.214 11.03* 324

oooool6* (6.25) -5.9657xlO-"* (3.47) 2.3907xlO-'* (2.98)

.259 14.17* 324

an asterisk (*) indicates of the t-statisties; indicates that a particular variable is omitted

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NATIONAL

TAX JOURNAL

effort, or RWATR). The parameter value for PARTEX suggests that a one-percentage-point increase here would cause a .83 percent increase in jurisdictional tax effort relative to RWATR. These coefficients imply elasticity estimates of .054 and .041 for WHOLEX and PARTEX, respectively. " Although consistent with expectations, these findings are provocative in that conventional wisdom suggests that partial exemptions are relatively unimportant as a source of fiscal stress; statewide, partially-exempt property constituted approximately 19 percent of total exempt value in 1987. Although their relative importance is likely to vary substantially across jurisdictions, partial exemptions appear to be a widespread source of property tax burdens. The exemption variables perform altogether differently in the tax effort (WATR) equations. WHOLEX and PARTEX display a negative (but in only one case statistically significant) relationship to this traditional burden measure. These findings lend support to the contention that tax rates offer an illusory glimpse of the fiscal impacts of exemptions. Jurisdictions may not exhibit systematically higher tax rates if they lower spending levels in response to this type of tax base erosion. Thus it would not be surprising to find that tax rates are not systematically related to measures of exempt property value. The magnitudes of the relationships here are ignored in view of the generally insignificant coeiticient values. The findings for other explanatory variables in the model are generally consistent with hypothesized effects. The capacity variable (CAPAC) has a negative and significant coefficient in all equations. This variable most likely serves as a proxy for tax base composition. Those communities with a larger fraction of commercial /industrial to residential propmy-value (azdvfts-gmater do"eity) may understandably face both lower tax rates and fewer fiscal problems." Alternative non-grant revenue sources (OTHREV) are shown to reduce property tax burdens regardless of the chosen measure. The coefficient of GRANTS is insignificant in the BURDEN equations but is

[Vol. XLIII

significantly positive in the WATR regressions. One explanation for this is that intergovernmental aid usually is targeted at those jurisdictions with greater "effore' as conventionally measured by tax rates."' Such aid, however, may not be instnnnental in actually reducing property tax burdens. The well-known "flypaper" effect of intergovernmental revenues is likely to be operative here. The coefficient of GENGOV is positive and marginally significant in Eq. 1, suggesting that administrative expenditures impair municipal fiscal health. The population variable is positive, and its squared value (POPSQ) is negative across all equations in Table 1. Although these variables are insignificant in the BURDEN equations, the findings here suggest that population may exhibit a nonlinear relationship with fiscal burdens. The initial positive impact of population may reflect taste factors, whereas further population increases may signal a capturing of scale economies. Finally, per capita income displays a significantly negative relationship with BURDEN but a positive one with WATR. This result may not be anomalous if highincome jurisdictions have stronger tastes for public spending, ceteris paribus. Although they will tend to have higher tax rates, their true fiscal burdens may be low in view of their property wealth. This notion is reflected in the construction of the BURDEN variable (via the influence of median property wealth on STREVI'K-) in the model. Eq. 2 reports a variant of the basic model, where CAPAC has been eliminated as a sensitivity test. Although jurisdictional capacity should influence any meaningful burden measure, both WATR and BURDEN are explicitly defined in capacity terms. The results here strongly parallel those from the basic model, with oite tift"on. The coefficient of GEMIOV becomes negative when CAPAC is dropped; a very high positive correlation (.895) between these variables may explain this statistical artifact. A possible interpretation is that general administrative expenses are more likely to become excessive in property-rich communities.

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No. 41

TAX EXEMPTIONS

Eq. 3 reports findings for the model in which a single, comprehensive measure of exemptions replaces WHOLEX and PARTEX. EXEMPT measures the total (weighted averge) percentage of town property exempt for various municipal p-4naWs. AGAIA,@ J -theft - d s conform to those of Eq, i,- -wi-t--h the* exem'p@i"o'n vanable being significantly positive in the BURDEN, but unimportant in the WATR, equation. The coefficient suggests that a one-percentage-point increase in EXEMPT would lead to a .375 percent increase in BURDEN. (This further implies a point elasticity estimate of .075. Thus a 10 percent increase in a jurisdictiox@s exempt property value would lead to a .75 percent

473

increase in its tax effort relative to the nom.) Table 2 reports findings for TOV areas. These results are all strongly supportive of those findings for the VIL areas. WHOLEX and PARTEX are positive in the *cmodol, -,- althowh the latter is only marginally signi Ci( ica ni-. EXEMPT has a positive and significant effect in Eq. 3. All of these exemption variables continue to perform in an unsystematic fashion in the WATR equations. The capacity variable is consistently negative, and its exclusion here has a similar effect as before. GRANTS has a negative (but still insignificant) coefficient in the BURDEN equations, and it

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

Variable: I

WATR

BURDEN ix

III

ii

III

.0265* (29.55)

.0273* (29.85)

.0270* (30.62)

-----

-.00150 (1.27)

-.00170 (1.41)

-----

CONSTANT

.4788* (4.63)

.5619* (5.35)

.5039* (4.96)

WHOLEX

.3558* (2.62)

.3341* (2.41)

PARTEX

.4827 (1.68)

.3136 (1.07)

-----

.00477 (1.92)

.00316 (1.24)

-----

EXENPT

-----

-----

.3176* (2.40)

-----

-----

-.00137 (1.19)

-.00040 (1.49)

.000011' (4.50)

Ooooii* (4.33)

-.000051 (0.20)

-.000022* (10.09)

-.000021* (9.35)

-.ooios* (2.72)

.0000069*

-.0000031

.0000059 (1.75)

------

-3.0536xlO-'* (6.83)

GRANTS

-.00045 (1.66)

OTHREV

-.000032 (0.12)

GENGOV

-.Ooioi* (2.59)

CAPAC

-.0000033* (6.43)

POP

POPSQ

INC

F-ratio d.f.

.0000076*

(3.21) -1.8312.10-l'

(1.82)

-.000027* (3.70)

-.00046 (1.66) .000088 (0.34) -.00204* (5.61) -----

ooooo8g* (3.65) -2.2198xlO-"*

(2.16)

-.000034' (4.51)

.181 6. 21.3 872

are 'Numbers in parentheses significance at the 5% level; from the equation.

-.0000033* (6.37)

-3.1489.10-'* (7.04)

.0000079* (3.31) -1.8937xlO-" (1.88) -.000028* (3.89)

.142 18.0 3* 873 absolute a blank

(1.98)

.176 23.71 873 values

(0.98)

ooooii* (4.81) -.000023* (10.30)

7.9065xlO-'* (3.83)

9.0634xlO-**

8.0758xlO-4*

-1.3038xlO-" (1.49)

-1.6731xlO-" (1.87)

-1.3291XIO-13 (1.52)

2.0664.10-'* (3.16)

2.4532xlo-7* (3.86)

2.6746xlO-'* (4.17)

.207 1. 25.2 872

(4.28)

162 ii.os' 873

(3.91)

.202 27.61' 873

(*) indicates of the t-statisties; an asterisk indicates that a particular variable is omitted

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remains positively associated with tax effort variations. OTHREV retains its negative coef!rlcient, but it is insignificant in explaining BURDEN variations; fewer opportunities for exploiting alternative revenue sources within TOV areas may explain this latter finding. The income variable performs as before in displaying both a negative effect on BURDEN and a positive impact on WATR. Similarly, POP is positively related to, and POPSQ is negatively related to, both burden measures. The previous contention regarding population effpcts is strengthened by the generally higher significance levels for these variables in Table 2. One notable difference between results is that GENGOV is both negative and significant in explaining BURDEN variations here, although it remains positively associated with tax effort. The size of the relationships between BURDEN and the exemption variables is smaller in the TOV areas. A one-percentage-point increase in wholly-exempt relative to total property value leads to a .36 percent increase in the relative tax effort index. The coefficient value of PARTEX implies that a one-percentage-point increase would cause a .48 percent increase in jurisdictional tax effort relative to the median. These coefficients imply elasticities of .035 and .026 for Vv'HOLEX and PARTEX, respectively. In Eq. 3, the coefficient of EXEMPT implies an elasticity of .054 (versus .075 in VIL areas). For comparative purposes, consider that the elasticity estimate for the capacity variable is -.065 and -.056 for the TOV and VIL areas, respectively. A given percentage increase in exempt relative to total. property value has an effect that is quantitatively similar to an equal percentage reduction in capacity. All of the estimated relationships reported in both tables are statistically significant. The-,pereeptaLe_of explained . vlt varl ;@t'!6n gener typical @ aily is wi rang e of cross-sectional analyses. Most importantly, the performance of the explanatory variables is quite robust across models, jurisdictional classes, and burden measures.

[Vol. XLIII

We experimented with a number of variables-that are not reported here. For example, neither outstanding debt nor debt expense exhibited a consistent significant relationship with either burden measure. Expenditures on select functions also proved to be an inconclusive source of fiscal stress. The exclusion of specific variables does not imply that they bear no systematic relationship to property tax burdens; rather, it implies that they did not perform well in this empirical exercise. In general, coefficient values and significance levels for reported variables were substantially unaffected by this choice. V. Summary

and Conclusions

This study provides evidence that property tax exemptions are a significant source of fiscal stress for local jurisdictions in NYS. The results suggest that the complete, and also the partial, removal of property from the tax base is generally detrimental to municipal fiscal health in a manner roughly comparable to a direct reduction in capacity. Further, the findings support the contention that the true impact of these tax subsidies may be masked by analyses based on traditional burden measures, such as effecti*e property tax rates. The credibility of our results is strengthened by a number of considerations. The model relies on the more realistic concept of a "taxing jurisdictional profile." The burden index developed here obviates an explicit adjustment for demand influence$ which remain embedded in a traditional measure such as tax effort. Finally, the empirical findings are very consistent across models and jurisdictional groupings. The results confirming the importance of partially-exempt properties are novel. Despite their relatively small role, these exemptions appear to be a general source 6Mi;@@f cTir@@aleies. In fe@ct,the egi'fiiates imply that a given percentage increase in the degree to which a community is "partially-exempt" will have an impact on the same order of magnitude as an equivalent change in wholly-exempt property. A re-

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sultant implication is that localities may be able to exercise more control over the impact of exemptions than was previously thought. Because jursidictions often must choose to allow partial exemptions that bAv-e-bep-n-outhorized by s tote. law, they appear to have at least som-e"@Vifit@ ' to influence fiscal impacts arising from these subsidies. This is not a consideration for wholly-exempt parcels for which local options typically are non-existent. Additional conclusions are less provocative. Capacity was demonstrated as having an inverse relationship with tax rates and fiscal burdens, suggesting that the property tax is less onerous in wealthier jurisdictions or in those with higher proportions of commercial/industrial to total property values. The importance of alternative own-source tax revenues is confirmed here, but the influence of intergoverrunental grants is more ambiguous. Specific expenditure categories were found to be largely unrelated to fiscal health, with the exception of general administrative outlays. Not surprisingly, propertyrich communities are more likely to suffer from bureaucratic over-supply or excessive administrative outlays. h is useful to distinguish between public and private exemptions in drawing broad policy implications. It may be politically infeasible to largely dismantle well-entrenched private exemptions, despite growing disenchantment with abatement practices. However, it seems pragmatic to allow jurisdictions to exercise more control over their own fiscal destiny by expanding the use of local option exemptions. In NYS, localities currently decide whether or not to allow partial exemptions, yet they have no recourse but to grant complete exemptions for other classes of private property. Despite numerous practical difficulties, allowing jUrisdictions to select their own local exemptions would enable them to alter the direct fiscal impacts of these policies. Of course, the long-term economic and financial consequences of these choices, though not yet fully understood, would have to be given appropriate consideration. The most logical response to the public

475

property exemption problem may be more extensive use of "payments in-lieu of taxes"15 programs funded at the state level. These plans typically entail directing compensatory payments to local governmt@Rtsbased on exempt prmrty wealth, although the inherent unreli@bilfty,;t'exempt property data remains a major stumbling block in implementation. Such a program even could be designed to incorporate payments for private sector activities viewed as truly "untouchable" and deserving of full state-mandated exemptions. Political support may be easier to obtain if these programs are heralded as providing equity adjustments to localities burdened with exemptions over which they have little or no control. Future research efforts should focus on the ultimate economic and fiscal impacts of alternative private property exemption policies. This study demonstrates the importance of utilizing an alternative to traditional tax effort in analyzing the -fiscal impacts associated with property tax abatements. Further methodological refinements may yield more detailed assessments in applications to other statelocal systems. ENDNOTES **The author wishes to thank the Rockefeller Institute of Government for a Senior Fellowship in support of this research. This manuscriipt benefitted enormously from the suggestions of anonymous referees and the editor of this Journal. I also thank Don Dutkowsky, Vincent Munley and Thomas Tyson for helpful comments. The usual caveat applies. 'See Quigley and Schmenner (1975) for a thorough discussion of historical justifications for property tax exemptions. 'For example, see the discussion in Pfister (1976), P. 442. 'In New York, three-quarters of the allowable exemptions are state-mandated rather than local option. In 1986, these mandated exemptions represented 86% of total exempt value in the state. (This and other figures describing the value of exemptions are obtained ftom: NYS Board of Equalization and Assessment, February 1988, and previous years.) 'This distinction is justified on the basis of the differential nature of partial vs. full exemptions in NYS: the former are extended primarily to private property owners (94% of partially-exenipt value in 1986 was pnvately-owned) at the discretion of local officials; the latter are mandated without localdiscretionfor gov-

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NATIONAL TAX JOURNAL

ernment and not-for-profit property (public sector holdings represented 80% of wholly-exempt value in 1986). 'Cities within the state have different revenue structures and institutional arrangements than towns and villages; accordingly, they are not considered in the present study. 'Towns and villages in the state may have a rural, suburban, or even urban character. In the sample, population sizes average 7520 and 2281 for the towns and villages, respectively; the largest towns and villages have populations exceeding 300,000 and 21,000, respectively. 'Capacity is defined solely in terms of property wealth because we are concerned with the ability of property tax-dependent jurisdictions to raise revenue from this source alone (and how their ability to raise revenue is subsequently impacted by exemptions). These jurisdictions rely almost entirely on the property tax as their source of own tax revenue, although they typically receive some revenue from the county portion of the state sales tax levy. Thus, it makes little sense to more broadly define capacity here in light of current legal and institutional arrangen@ents. 8Demand factors will not be reflected in BURDEN unless they vary systematically with cost factors. We argue that cost conditions are more likely to display a pronounced systematic pattern across the diverse regions of the state than demand forces. Although "taste" factors will undoubtedly exhibit locational variations, they may be influenced more by type of location (e.g., urban versus rural versus suburban) than by geographic location per se. The geographic regions employed here conforin to the ten distinct "economic development regions" as defined by the NYS Department of Economic Development. 'For comparative purposes, the analysis is conducted without regional standardization, i.e., by relying on statewide values in defining RWATR, etc. These results (not reported here) are mutually supportive of those based on regional standardization, although differences in magnitudes exist. The regionally standardized results will more accurately reflect fiscal burdens if cost conditions are more systematically linked to geographic patterns than are demand influences. 'O'Mii; approach was suggested by an anonymous referee. "Although expenditure-determinant equations are often estimated via a log-log specification, there is no theoretical basis for doing this here. Because the traditional burden measure (WATR) is a ratio, there are inherent difficulties with OLS estimation. However, because these problems become much less severe with larger sample sizes, we opt to remain with OLS rather than employ techniques developed explicitly to deal with limited dependent variables. "Recall that BURDEN is defined as the percentage change,fmm the-rwrewiitatve tax rate, whereas the exemption variables are measured as percentge levels. The elasticity estimates reported here are cakulated at the median and are reflective of the percentage change from the representative tax rate (i.e., the absolute change in BURDEN) due to a given percentage change in any of the explanatory variables. "Unfortunately, data detailing the composition of the property tax base below the county level is not

[Vol. XLIII

generally available. Thus, we are unable to directly test the effect of composition on fiscal burdens. 14The potential for simultaneous equation bias is recognized in the WATR equations. ""rhe federal government has an extensive, though uncoordinated, system of "payments in-lieu of taxes" to state and local governments; see ACIR (1981), pp. 33-43 for a description. At least three states (Wisconsin, New Jersey & Connecticut) have initiated '@pilot" programs to relieve the fiscal pressures on their localities with extensive holdings of exempt properties. See Rosner (1986) for a discussion of recent trends. REFERENCES Aronson, J. Richard and J. L. Hilley, Financing State and Local Governments (4th ed.), The Brookings Institution, Wash., D.C., 1986. Auten, Gerald E., "The Distribution of RevenueSharing Funds and IkW Public Expenditure Needs," Public Finance Quarterly, Vol. 2, No. 3, July 1974, pp 352-375. Benson, Earl D., B. R. Marks, and K. K. Raman, "Tax Effort as an Indicator of Fiscal Stress," Public Finance Quarterly, Vol. 16, No. 2, April 1988, pp. 203218. Ebel, Robert D. and James Ortbal, "Direct Residential Property Tax Relief," Intergovernmental Perspective, Vol. 15, No. 2, Spring 1989, pp. 9-14. Fastrup, Jerry C., "Fiscal Capacity, Fiscal Equalization and Federal Grant Formulas," in Federal-StateLocal Fiscal Relations, Technical Papers, Vol. 1, U.S. Department of the Treasury (Office of State and Local Finance), USGPO, Wash., D.C., Sept. 1986, pp. 41-62. Gold, Steven D., Property Tax Relief D.C. Heath & Co., Lexington, MA, 1979. Hattery, M. R., et al., Services Provided by Local Govemments in NYS, Special Report of the NYS Legidative Commission on State-Local Relations, Dept. of Agricultural Economics, Cornell Univ., March 30, 1987. Howell, James M. and C. F. Stamm, Urban Fiscal Stress (A Comparative Analysis of 66 U.S. Cities), D.C. Heath & Co., Lexington, MA, 1979. Mullen, J. K., "The Impact of Property Tax Exemptions on Municipal Fiscal Burdens," working paper, Rockefeller Institute of Government, Albany, N.Y., Oct. 1989. New York State Legislative Institute (Economic Research Service, Baruch College), "The Problem of Real Property Tax Exemptions: Legislative Options," March 1977. New York State, Office of the State Comptroller (Bureau of Municipal Research and Statistics), Overall Real Property T= Rates (local governments in NYS), fiscal year ended in 1987, Albany, N.Y., 1988. -, SPWWRIPDrt On Mu-qXd Aff-. fiscal year ended in 1987, Albany, N.Y., April 1988. -, Local Governments and Their Use of Sales T=es in NYS, Albany, N.Y., Sept. 1988. -, Municipal Code Manual, Albany, N.Y., December 1987. -, unpublished data on village school districts, made available in Spring 1989. New York State, Board of Equalization and Assess-

National Tax Journal, Vol. 43, no. 4, (December, 1990), pp. 467-79

No. 41

PROPERTY

TAX EXEMPTIONS

ment, IVYS: Rolls,

Exemptwns from Real Property Taxatton in 1986 County, City, and Town Assessment Vol. 1, Albany, N.Y. February 1988. -, New York State Propeny Value Trends By Class, 1974-1983, Albany, N.Y., April 1988. Obern, Catheryn C., Fiscal Stress in New York State Counties, Ph.D. tbesis (Cor4eU University, 1987), University Microfilms, Ann Arbor, MI, 1987. Pfister, Richard L., "A Re-evaluation of the Justifications for Property Tax Exemption," Public Finance Quarterly, Vol. 4, No. 4, Oct. 1976, pp. 431452. Property Taxation Committee of the National Tax Association, "The Erosion of the Ad Valorem Real Estate Tax Base," Tax Policy, Vol. 40, No. 1, (1973), pp. 1-94. Quigley, J. M. and R. W. Schmenner, "Property Tax Exemption and Public Policy," Public Policy, Vol. 23, No. 3, Summer 1975, pp. 259-297. Rafiise, Robert W., "A Representative Expenditure Approach to the Cost of the Service Responsibilities of Sta:tes," in Federal-State-Local Fiscal Relations, Technical Papers, Vol. 1, U.S. Department of the Treasury (Office of State and Local Finance), USGPO, Wash., D.C., Sept. 1986, pp. 133-186. Rockefeller Institute of Government (SUNY), 198687 New York State Statistical Yearbook (13th edition), Albany, N.Y., July 1987. Rosner, Monroe H., "In-Lieu-Of-Tax Payments by Exempt Organizations: Issues, Trends and Innovations," NTA-TIA 1986 Annual Proceedings, pp. 104109. Texas Advisory Commission on Intergovernmental Relations, "Local Government Fiscal Capacity Measures: A Profile of State Studies," in FederalState-Local Fiscal Relations, Technical Papers, Vol. 1, U.S. Department of the Treasury (Office of State and Imal Finance), USGPO, Wash., D.C., Sept. 1986, pp.263-295. U.S. Advisory Commission on Intergovernmental Relations, City Financial Emergencies: The Intergovernmental . Dimension, Report No. A-42, USGPO, Wash D.C., July 1973. -, @a@ments in-Lieu of Taxes on Federal Real Property, Report No. A-90, USGPO, Wash., D.C., Sept. 1981. -, Tax Capacity of the Fifty States. Methodology and Estimates, Report No. M-134, USGPO, Wash., D.C., March 1982. U.S. Department of Commerce (Bureau of the Census), Northeast. 1986 Population and 1985 Pe, Capita Income Estimates for Counties and Incorporated Places, Current Population Reports, Series P-26, No. 86-NE-SC, USGPO, Wash., D.C., March 1988

Appendix A-Construction of WATR and BURDEN Measures of Fiscal Stress The weighted average tax rate on property within a specific village (VIL) or "town outside village" (TOV) area is defined as:

WATR,

tr,,vi

Wi i

(Al)

wheretrii

477

= the ad valorem (full value) tax

rate for one of j = 1 through n tax-levying jurisdictions within area i;* Vi@= the full value of taxable property as assessed by one ofj taxlevying jurisdictions; and wj i = a weight reflecting that fraction of total tax levies within i arising from the levy of j. The median per capita capacity is calculated for the separate municipality classes (VIL and It TOV). This allows for a definition of the standardized capacity" tax rate as:

STCAPTF@

tri,v, 1

(CAP*POP,)

(A2)

where CAP is the median capacity, POP, is the I area s population, and the term in the nunierator is that arews total (multi-jurisdictional) revenue yield. Also, we compute the "standardized revenue" tax rate as:

STREVTP,

= (RPC*POP,)

E

W4 1 'V@

(A3)

where RPC is the median revenue per capita, and the term in the denominator is the area's weighted-average taxable property value. A weighted average is appropriate here (and also in Al) because the distinct taxing jurisdictions, via their decisions to allow/disallow local option exemptions, typically do not rely on the same definition of taxable value. As noted, differences between WATR and RWATR are due to capacity and/or spending deviations from the median. This may be seen alternatively as: WATR,

- RWATR

+ (STCAPTK

= (STREVTR, - RWATR).

- RWATR) (A4)

Because of computational ease, BURDENI is calculated by relying on estimates of WATK and STCAPI'K as in (3). It should be noted that the theoretical equivalent measure in (2) yields identical values for BURDENI.

*The calculation of WATRs for the TOV areas involves summing over three separate taxing juris&ctions: county, town, and school district. Tax levies based on property values determined to be taxable for village purposes represent the additional layer of government within VIL areas. The myriad of tax-levying special districts are not considered here, but their mnar relative-revenue importance justifies their exclusion.

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Appendix B-Data Requirements, Sources and Variable Definitions Burden measures are generated for the majority of VIL and TOV areas within the state. Substantial jurisdictional overlapping creates data disaggregation problems that cannot be o@ercome in some cases. Nevertheless, we denve a sample of 333 village areas and 882 TOV areas (out of a possible 558 and 932, respeetively). The calculation of WATR for VIL areas is described below. [See Mullen (1989) for a more detailed illustration of this procedure and a description of exclusion criteria in building the sample.] For a specific VIL area, tax effort is calculated following (Al) as: WATK

trlvl, /E

WAlvli

where all variables are as previously defined but, more specifically, where Ilti'iV'@ (county tax rate * taxable value, county purposes) + (town tax rate * taxable value, town purposes) + (school district tax rate * taxable value, school district purposes) + (village tax rate * taxable value, village purposes). A major difriculty here is that taxable values for school district purposes within specific villages generally are not available because their borders are seldom coterminous with those of school districts. We assume that the taxable value for school district purposes is equal to that for town purposes. [This assumption is tenable because of the small deviation among taxable values for the various jurisdictional purposes. Taxable values are usually assigned by town assessors, and other taxing authorities may adjust these figures slightly in deciding whether or not to allow the same partial exemptions as the town.] Another problem is that numerous villages "giar6" a town with another village (or villages). In most cases, it is still possible to apportion relevant values to individual villages. Villages located in multiple counties, or containing more than one school district, are excluded from the sample. Two primary data sources are utilized. The Special Report on Municipal Affairs (NYS, Office of the State Comptroller) provides detailed information on property tax and other revenues, expenditures, population, etc., for coun-

[Vol. XLHI

ties, towns, school districts, and villages. Data on assessed value, exempt value, and equalization rates are provided by the NYS Board of Equalization and Assessment's Exemptwns from Real Property Taxation in NYS (Feb. 1988). These data detail the value of exemptions from property taxation (for town, school district, and county purposes) for entire towns. It is not possible to separate the value of exemptions in the VIL versus TOV portions of a given tovai; further, the exempt value for village purposes is unavailable given current state legislation regarding financial reporting requirements for thee jurisdictions. It is possible, however, to calculate the weighted average percentage of town property exempt from taxation for various (other than village) jurisdictional purposes; also, that fraction of total town property value which is wholly and partially exempt is discernible. The latter figure is a weighted average, but the '@)ercentage wholly exempt" is not because all jurisdictions must allow this type of state-mandated exemption. Variable Definitions [Primary data sources appear brackets]

in

CAPAC-capacity per capita, defined as the weighted average value of property divided by the population [MF, OTRLI EXEMPT-weighted average percentage of total town property value exempt for various purposes [EA] GENGOV-general government expenditures per capita, all tax-levying governments [MFI GRANTS-per capita revenues from all intergovernmental grants, sununed over all taxlevying governments [NFI INC-1985 per capita income, village or total town area [CPR] MMV-per capita non-property tax revenues, summed over all tax-levying governments [MF] PARTEX-partially-exempt property value as a (weighted average) percentage of total property value within the town [EA] POP-1980 population, village area only [MFI; 1986 population, TOV area only [CPR] POPSQ-population variable squared WHOLEX-wholly-exempt property value as a percentage of total property value within the town [EA]

National Tax Journal, Vol. 43, no. 4, (December, 1990), pp. 467-79

No. 41 Key for prhnary

PROPERTY

TAX EXEMPTIONS

data sources:

OTRL-Overall Tax Rate/Levy File, Overall Real Property Tax Rates, NYS Office of the State Comptroller, 1988 MF-Spe,cial Report on Municipal Affairs, NYS Office of the State Comptroller, 1988

EA-Exemptions from Real in IVYS: 1986 County, City, nwnt Rolls, NYS Board of Assessment, 1988 CPR-U.S. Bureau of the Population Reports, 1988

479 Property Taxation and Town AssessEqualization and Census,

Current