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Local Public Finance

Paper Session

Saturday, Jan. 4, 2025 8:00 AM - 10:00 AM (PST)

San Francisco Marriott Marquis, Nob Hill B
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Remi Jedwab, George Washington University and New York University

Levees and Levies: Local Financing of Climate Infrastructure Maintenance and Housing Market Dynamics

Yichun Fan
,
Massachusetts Institute of Technology

Abstract

Local financing of climate infrastructure maintenance structurally connects infrastructure quality with housing value through property tax revenue. I study how this connection shapes the long-term dynamics of neighborhood housing value and climate risk. Using novel data on the quality of flood protection levees from inspection records and satellite imagery, I show that low income neighborhoods are disproportionately behind levees of maintenance deficiencies, leading to income inequality in levee failure risk. This cross-sectional disparity is shaped by a self-reinforcing feedback loop between local housing value and levee maintenance quality. Using Bartik-type instruments, I find that weaker local housing value growth, driven by exogenous economic forces, leads to a decline in levee maintenance quality. Insufficient maintenance increases the risk of levee failures, which subsequently reduces housing value by 3-9%, creates negative income sorting, and shrinks local budgets, further undermining future maintenance investments. These feedback dynamics amplify economic and climate inequality and contribute to widespread maintenance deficiencies in levees that have a positive net present value to maintain.

The Pricing of Property Tax Revenues

Erica Xuewei Jiang
,
University of Southern California
Baiyun Jing
,
Harvard University
Anthony Lee Zhang
,
University of Chicago

Abstract

Suppose a local government collects 3% of the market price of regional real estate in taxes each year. We show that this tax payment stream is equivalent to a stream of claims to future rent flows: the government owns 3% of this year’s rent, approximately

6% in two years, 9% in three years, and so on. This result implies that seemingly small property taxes extract a large fraction of the value of future rents; that tax revenues are very sensitive to changes in interest rates; and that governments funded by tax revenues have future-biased incentives to invest in public goods.

Financing the Flooded Cities: Climate Risks and Local Governments’ Fiscal Costs

Yongheng Deng
,
University of Wisconsin-Madison
Lina Meng
,
Xiamen University

Abstract

We examine the impact of floods on the local public financing costs in emerging economies. Taking municipal corporate bonds (MCBs) in China as an example, we find that floods significantly increase local government borrowing, and investors cautiously provide proceeds by demanding higher credit spreads of MCBs after floods. Local governments in coastal regions significantly increase borrowing by issuing bonds to build back after floods, and investors demand higher credit spread of short-term MCBs in these regions. Government aid and implicit guarantees play a crucial role in mitigating the impact of flooding on MCBs. The mechanism analysis shows that floods affect the MCB market through the channels of fiscal deficits, repayment ability, and risk uncertainty caused by frequent flooding.

Local Governments' Response to Fiscal Shocks: Evidence from Connecticut

Oliver Giesecke
,
Stanford University
Haaris Mateen
,
University of Houston

Abstract

The deteriorating fiscal position of municipalities across the United States raises the question which adjustment mechanisms municipalities have at their disposal and what their effects are. We utilize quasi-experimental variation in the year of property tax assessments in the state of Connecticut to provide causal evidence of the fiscal adjustment following a large decline in property values after the Great Financial Crisis. We find that local governments adjust tax rates to maintain stable tax revenues; there is no change in public employment levels and limited adjustments of public services. Our micro data on people's location further allows us to causally estimate the migration elasticity to a change in property tax rates. We find evidence of inter-state migration in response to an increase in property tax rates; and no statistically significant response of intra-state migration. Detailed property and location choice data reveal the elasticity of migration with regard to the property tax bill. An increase in the property tax bill by ten percent leads to an average increase in the migration propensity by about 1.5%.

Discussant(s)
Eunjee Kwon
,
University of Cincinnati
Paul E. Carrillo
,
George Washington University
Natee Amornsiripanitch
,
Federal Reserve Bank of Philadelphia
Scott Wentland
,
George Washington University
JEL Classifications
  • R0 - General