BUYING THEIR VOTES? A STUDY OF LOCAL TAX-PRICE DISCRIMINATION

I. INTRODUCTION Financial support for public schools in developed countries has recently been declining as governments face increasing pressure to balance their budgets by reducing expenditures on public services. Public school revenues may be particularly vulnerable in countries where elderly residents will compose a rising share of the population. While the percent of United States residents over the age of 65 was 12.4% in 2000, the U.S. Census Bureau (2008) predicts this will rise to 16.3% by 2020 and 20.7% by 2050. Recent growth in the upper-middle-aged population (ages 55-64) has occurred throughout the United States and, if current trends continue, communities with the largest growth in the elderly share (ages 65 and over) over the next 30 years will experience this growth primarily due to "aging-in-place" rather than residential migration (Frey 2007). The typical school district will thus have an increasing share of adults who do not consume public schooling services. This trend could have two important implications for school districts: (1) decreased political support for school expenditures and (2) a greater tax base per student due to a reduction in the relative size of the school-aged population. If the former effect dominates the latter, then local district revenues per student will decline. This dynamic would be consistent with prior U.S. trends. Figlio and Fletcher (2012) find that most of the within-metropolitan-area variation in suburbs' age distributions in 1980 and 1990 can be traced back to these suburbs' age distributions when adults settled there in earlier decades. Those authors simulate the shares of elderly adults residing in various suburbs based on the aging-in-place of early residents, and their simulated elderly shares are negatively correlated with suburban school expenditures. State or federal governments could potentially alter this dynamic by subsidizing local property tax reductions that are targeted toward elderly homeowners. Elderly homeowners receiving these reductions might support higher levels of local public school spending, because they can maintain high property values at a relatively low cost. In other words, elderly homeowners' preferred level of local tax revenues may be sensitive to their marginal local tax-price--the change in their tax payments required to increase local school district revenues by one dollar. By influencing elderly homeowners' preferred local tax rates, targeted tax-price reductions may shift the identity of the local median voter and thus moderate how changes in demographics affect local public revenue. This article is the first to empirically examine whether targeted tax-price reductions moderate the impact of age demographics on local government revenues. Prior studies examined how the aging-in-place of local populations affects public school revenues (Figlio and Fletcher 2012; Harris, Evans, and Schwab 2001 ; Ladd and Murray 2001), and this article tests whether there is important within-sample heterogeneity in these effects. Using similar methods as these prior studies, the empirical models below isolate the exogenous component of changes in local age demographics by using lagged population shares as instrumental variables predicting future age demographics. To test for heterogeneous effects, I assembled a longitudinal data set concerning states' property tax reduction policies for elderly homeowners. The results confirm earlier studies' findings that exogenous increases in the fraction of elderly residents (ages 65 and over), on average, decrease tax revenues in U.S. school districts. However, state-financed reductions in elderly homeowners' marginal local tax-prices significantly reduce the negative effect of the local elderly population share. This negative effect is only large in communities not offering any targeted local tax-price reductions to elderly homeowners. Significant differences in the effects of the elderly share across state policy regimes are robust to several alternative empirical specifications, including comparisons of school districts that are located near each other on opposite sides of state borders. …