By Mathew D. McCubbins (Duke University) and Ellen C. Seljan (Lewis & Clark College)
Local governments across the United States often find themselves needing to seek out new revenue sources, particularly in the face of state limitations on taxation. Our research examines the usage of special assessments, a particularly popular, but understudied source of local revenues, in the state of California. Today, special assessments are commonly used to back local infrastructure projects and provide growing number of public services, from local fire and police protection to street maintenance and repair.
Any local government agency can sponsor a special assessment district, and the boundaries of that district need not mirror the boundaries of the sponsoring government. Though they appear on property tax bills and are assessed exclusively on property owners, special assessments are legally distinct from “property taxes”. For one, their method of calculation is different: Instead of being calculated based on the assessed value of a home, a special assessment is generally assessed based on the “benefit” received by the homeowner. Most commonly, this results in flat fees or calculations based on home square footage.
Under what conditions will taxpayers prefer to adopt special assessments rather than raise more traditional local taxes? While the nature of the public service surely plays an important role in this decision, we argue that the local social and economic context helps determine what financing mechanism individuals will prefer to use to finance local government. In particular, we argue that assessments, as opposed to other forms of taxation, will be used when residents hold anti-redistributive preferences.
We make this prediction because special assessments are able to constrain the redistribution in two ways. First, a district can limit services to a small, often heavily gerrymandered, geographic area. This effectively precludes redistribution by limiting access to public services to those who live in the area and pay for it. For example, landscape and lighting districts are generally drawn at a block-level, encompassing only a neighborhood or planned development. Second, a district can be funded using a flat, lump-sum fee or another benefit calculation with the same distributive impact. This limits redistribution by equalizing payments more or less regardless of ability to pay. For example, many cities in the bay area — Oakland, San Francisco, and Cupertino, for example — have passed flat special assessments to support their school systems.
Following previous research, we expect that anti-redistributive preferences are highest in cities with high median incomes and high levels of ethnic diversity. To test the hypothesis that special assessments will be most utilized under these conditions, we collect data from individual property tax bills of single-family residences in the state of California as well as the demographic attributes of cities. Our results confirm our expectation that annual special assessment payments are correlated with the ethnic diversity and median family incomes of the cities within which they are located. The same relationship is not true of general obligation bonds, a common alternative revenue source used by local governments. We also show that certain types of assessments, those with the most limited geographic ranges, are frequently levied on expensive homes in poorer cities.
By allowing subsets of geographically defined residents to come together to form assessment districts, this financing mechanism has given rise to new, centrifugal forces within U.S. cities. We liken the usage of special assessments to a form of “fiscal secession” from general governments. In this way, the rise of special assessments has two competing repercussions for U.S. inequality. From one vantage point, special assessments may contribute to public service inequality, not only between but also within U.S. cities. However, to the extent that assessments allow struggling inner cities to “keep their suburbs” by providing a viable alternative to relocation and separate incorporation, they may be better than the alternatives for the purposes of reducing U.S. inequality.
Mathew D. McCubbins is an interdisciplinary scholar whose work explores the intersections of law, politics and political economy. He has published more than 125 articles, six books, and has edited eight additional books in political science, public policy, law, computer science, cognitive science and psychology, economics, and biology. He holds a joint appointment in Duke University’s Department of Political Science and in the Law School. He is also the Director of the Center on Democracy and the Rule of Law in the Duke Law School.
Ellen C. Seljan is an Associate Professor of Political Science at Lewis & Clark College. She publishes research in the field of state and local politics with an emphasis on matters of public finance.