Property Taxation, Zoning, and Efficiency in a Dynamic Tiebout Model
This paper presents a new dynamic Tiebout model and uses it to revisit a classic argument in state and local public finance. The argument, due to Hamilton, is that a system of local governments financing service provision via property taxes will produce an efficient allocation of both housing and services if governments can implement zoning ordinances. In the model, it is shown analytically that when local governments choose zoning along with taxes and services there does not exist an equilibrium that is both efficient and satisfies a local stability property. It also shown using numerical methods that there exists an equilibrium in which governments overzone and households are forced to over-consume housing. These findings challenge the Benefit View of the property tax.