Tax Deductibility and Municipal Budget Structure

35 Pages Posted: 23 Mar 2007 Last revised: 30 Jan 2021

See all articles by Harvey S. Rosen

Harvey S. Rosen

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: April 1987

Abstract

This paper investigates the effects of deductibility of local taxes on communities' budgetary decisions. Our focus is on how changes in the tax price of local spending induced by deductibility affect the mix between deductible and nondeductible revenue sources, and on expenditures. The econometric analysis is based on a rich data set that tracks the fiscal behavior of 172 local governments from 1978 to 1980. We find that the elasticity of deductible taxes with respect to the tax price is in the range -1.2 to -1.6; the tax price has no statistically significant effect on the use of nondeductible revenue sources; and the elasticity of local expenditures with respect to the tax price is about -1.8. Hence, if deductibility were eliminated, we would expect to see a substantial decline in local government spending.

Suggested Citation

Rosen, Harvey S., Tax Deductibility and Municipal Budget Structure (April 1987). NBER Working Paper No. w2224, Available at SSRN: https://ssrn.com/abstract=975936

Harvey S. Rosen

Princeton University - Department of Economics ( email )

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Princeton, NJ 08544
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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