State and Local Public Finance Spring 2014, Professor Yinger

1. State and Local Public FinanceSpring 2014, Professor Yinger Lecture 3 Voting

2. State and Local Public FinanceLecture 3: Voting Class Outline • The Median Voter Model • How does it link voting and demand? • Why it is useful? • What are its limitations? • Property Tax Limitations • What are they? • How do they shed light on voting?

3. State and Local Public FinanceLecture 3: Voting • In most cases, citizens cannot directly express their demand for local public services. • So they express their demand through their voting, either for public officials or on referenda. • In this class, we explore how an understanding of demand helps us understand the choices local governments make.

4. State and Local Public FinanceLecture 3:Voting • The median voter always votes on the winning side. • Line voters up by the strength of their preference for public services. • Identify the voter in the middle—the median voter. • A majority vote must include the median voter. --------------------M-------------------- weakest strongest preference preference

5. State and Local Public FinanceLecture 3:Voting • But voters do not line up, so the median voter is not identified! • The median voter modelshows how to identify the median voter assuming preferences are driven by demand factors. • The median voter has the median income and the median tax price. • This model places certain restrictions on preferences. • This model assumes political institutions are neutral.

6. $ TP = MC D = MB S* S State and Local Public FinanceLecture 3:Voting • The Median Voter Model

7. State and Local Public FinanceLecture 3: Voting • The median voter model is widely used because: • It explains community decisions based the demand function for a single voter—the median voter. • It makes use of widely available data at the community level: spending (or performance), median income, median tax price (median divided by mean house value). • It works!

8. State and Local Public FinanceLecture 3: Voting • Example: Duncombe & Yinger, National Tax Journal, 1998 • 1991 data for 630 school districts in from New York State • Service quality measured by an index of high school exams and drop-out rates • Income elasticity = 0.38 (based on median income) • Price elasticity = -0.24 (based on median tax price) • Significant preference variables include occupation mix, share of housing that is owner-occupied.

9. State and Local Public FinanceLecture 3: Voting • In some cases, preference assumptions matter. • Consider two communities with a high demand for education, one (City A) with a good private school and the other (City B) without. • In City A, the high demand for education may not show up as a high demand for public education. • In this case, which is extreme, the median voter model breaks down.

10. State and Local Public FinanceLecture 3: Voting • Scholars disagree about the importance of institutions. • Some scholars believe institutions are fairly neutral in most cases, particularly outside large cities. • Other scholars believe bureaucrats can have a large impact on spending and service quality—the leviathan view. • In some cases, it is possible to control for institutions, such as whether a city as a mayor or a city manager.

11. State and Local Public FinanceLecture 3: Voting • The Case of Tax Limits • Tax limits challenge the median voter model: Why do voters need to limit taxes if they control spending anyway? • Some scholars believe that most tax limits make a political point with little impact on spending. • Others believe that tax limits reveal voters’ belief in leviathan—and their desire to reign in bureaucrats.

12. State and Local Public FinanceLecture 3: Voting • The evidence for the U.S. as a whole leads to four conclusions. • First, property tax limits shift the tax burden away from property taxes to other revenue sources. • This shift was very large right after Proposition 13 in CA and Proposition 2 ½ in MA. • But the shift has moderated since then.

13. State and Local Public FinanceLecture 3: Voting • Second, strong tax and expenditure limits (TELs) limit but do not stop the growth in state government revenue. • A large share of this effect comes from a drop in state aid to local governments • And hence involves a higher burden on local tax sources. • The magnitude of these impacts depends on the design of the limit (see Professor Kioko’s article).

14. State and Local Public FinanceLecture 3: Voting • Third, there is no compelling evidence that TELs have boosted the efficiency of state and local governments. • States with strong TELs have experienced a decline in the quality of public services. • The performance by California’s students on national tests has dropped significantly, for example, since Proposition 13.

15. State and Local Public FinanceLecture 3: Voting • Fourth, voter demand factors still matter even with strong TELs. • California has severe limits. • But Duncombe and Yinger (2011) find that voters with higher incomes or lower tax prices still pick higher school quality • Through active monitoring of school officials or the use of secondary revenue sources, such as parcel taxes or private foundations.

16. State and Local Public FinanceLecture 3: Voting • The New Tax Cap in NY • Last year Governor Cuomo proposed and the legislature passed a cap on tax levy increases for all local governments. • The cap is the lesser of 2% and inflation, with exceptions. • The cap exempts new construction (to preserve incentives for development and growth).

17. State and Local Public FinanceLecture 3: Voting • The New Tax Cap in NY, 2 • The legislation allows jurisdictions to override the cap with a 60% vote. • A survey by the NY Comptroller finds that 179 of 747 local governments passed overrides for 2012. • Also, 29 of the roughly 680 school districts passed overrides (and 19 tried but failed).

18. State and Local Public FinanceLecture 3: Voting • The New Tax Cap in NY, 3 • Nobody should expect this cap to make local governments more efficient. • Without more state aid (unlikely) or many overrides (more likely, at least in the long run) this cap will cut local services.

19. State and Local Public FinanceLecture 3: Voting • The New Tax Cap in NY, 4 • This cap is likely to increase disparities across jurisdictions in education and other public services. • Richer school districts are more likely to override the cap. • Poorer school districts need larger percentage increases in revenue just to keep up with richer districts.

20. State and Local Public FinanceLecture 3: Voting • The New Tax Cap in NY, 5 • Some wealthy districts raise $30,000 in property taxes per pupil; Buffalo, Rochester, and Syracuse (the Upstate Big 3) raise $3,700. • In 20 years, the allowable annual revenue will go up by $30,000×[(1.02)20 – 1]=$14,578 in these rich districts, • But by only $3,700×[(1.02)20 – 1] = $1,798 in the Upstate Big 3.