State Aid Fuels Local Spending Growth and Higher Property Taxes

Politicians running for statewide office routinely promise to reduce property taxes, which are actually set at the local level by local officials.

Instead of focusing on the real problem, which is overspending at the local level, governors and legislators promise to increase state aid to local units anticipating that the funds will be used to limit the growth in property taxes and local spending. This approach has proved futile in terms of economic outcomes.

Between 2000 and 2011 as a share of gross domestic product (GDP), the 26 states that increased state aid to local government raised property taxes by a median of 0.31 percentage points while the 24 states that reduced state aid to local units expanded property taxes by a smaller 0.26 percentage points. Furthermore over the same time period, the same 26 states that increased state aid boosted local spending by 1.05 percentage points while the same 24 states that reduced state aid enlarged local spending by a smaller 0.27 percentage points.

Thus, past data show that not only did state aid not provide property tax relief, as customarily promised, property tax burdens and overall local spending actually rose more quickly for states that grew state aid more swiftly.

What should state policymakers do instead? States should limit the increase in state aid to local units to the growth local population plus the increase in prices. This action would tend to reduce state tax burdens and encourage local political leaders to limit growth in local spending.

Ernie Goss