An Insurance Model of Property Tax Limitations

Forty-three states in the United States have legal limits on local property taxation. These limits constrain increases in local government revenues, increases in property values, and the level of tax rates. A large literature cites the desire of taxpaying voters to constrain wasteful local government expenditures as the primary motivation for these limitations. The ability of tax limitations to insure voters against unexpected increases in property tax payments, however, offers an alternative motivation. Introducing risk into standard models of local service demand demonstrates that voters may support tax limitations in the absence of any perception of wasteful government expenditures. ∗Contact information: Nathan Anderson (corresponding author): [email protected], Department of Economics and The Institute of Government and Public Affairs, University of Illinois at Chicago. Andreas Pape: [email protected], Department of Economics, University of Michigan.