Compensating Changes to the Property Tax Levy? An Empirical Test of the Residual Rule

The residual view of the property tax assumes that local governments set their levy as the difference between budgeted expenditures and expected receipts from other revenues. If localities actually follow this approach then they would adjust the levy in the short run to compensate for economic shocks. While this behavior would help stabilize overall finances, it may come at the cost of predictability, a pressing concern for officials interested in the political sustainability of their fiscal structure. Using data from counties and school districts in Georgia, this paper estimates a series of short-run income elasticities to obtain the compensating changes to the levy the residual requires. It then tests whether actual fiscal behavior is more consistent with the residual rule or with an alternative model. The results indicate that only a little more than a third of jurisdictions are found to follow the residual rule