By Matt Kelly

A new study by DeVoe Moore Eminent Scholar Keith Ihlanfeldt and economist Kevin Willardsen explores property taxes in Florida. The authors challenge the conventional wisdom that governments only consider the “public interest” when writing their budgets and setting tax rates. With property taxes accounting for 31% of Florida’s total revenues, understanding how rates are determined is vital to policy makers, voters, and taxpayers.

The property tax rate, or “millage rate,” Ihlanfeldt and Willardsen write, can be thought of as a “strategic policy tool in the competition among local governments for mobile capital.” However, as with business monopolies, governments with “monopoly power” can charge higher prices to their customers (i.e. higher taxes for residents).

The city of Miami, for example, has a particularly large footprint on beachfront property in southeast Florida. Residents and businesses may be reluctant to abandon the city’s beach access or other natural resources, even if millage was significantly increased. This monopoly power insulates the city from the competition of neighboring jurisdictions with lower tax rates.

Ihlanfeldt and Willardsen seek to examine this monopoly power in Florida’s local governments by estimating what economists call the “elasticity of the tax rate with respect to the tax base.” In other words, they measure how changes in a community’s tax base have effected changes in tax rates. The authors break down local governments into four categories: rural townships, townships in metropolitan areas, counties, and principal cities of metropolitan areas. Notably, the study goes beyond previous research by examining the property tax rate’s responsiveness to both upward and downward changes in property value. Communities with more monopoly power, like Miami or other principal cities, are expected to raise taxes more when the tax base declines, and lower rates less when the tax base increases. This implies higher spending and tax rates because of the reluctance of its residents and businesses to move.

Their results show principal cities behave just so, especially when compared to communities in rural areas or other towns in a metropolitan area. The authors see these observed differences in tax rates as evidence of greater monopoly power in the local governments of principal cities.

These results challenge the notion that governments always act in the “public interest”. In their review of past research, the authors note, “one of the alleged virtues of the property tax is that it produces relatively stable revenues regardless of movements in real estate markets.” In principle, governments can lower rates when property values increase and raise rates when values fall, a practice called “offsetting”. Indeed, they find Florida’s local governments increased millage rates in response to the decline in property values during the 2007-2009 recession. But these adjustments varied from place to place. Ihlanfeldt and Willardsen find this “offset mechanism” is weaker than previous research suggested, and will vary depending on a government’s “monopoly power.”

Florida residents and businesses choose to locate in a given area for numerous reasons. The local tax structure may be one such consideration. Ihlanfeldt and Willardsen’s study refines the conventional wisdom on property taxes, explaining how rates are determined in political systems and how they change in response to economic shocks. These are valuable insights for Florida’s taxpayers.

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