Property Taxation, Zoning, and Efficiency in a Dynamic Tiebout Model

Abstract

This paper presents a dynamic Tiebout model and uses it to revisit a classic argument in public finance. The argument, due to Hamilton (1975), is that a system of governments financing services with property taxes will produce an efficient allocation of housing and services if governments can implement zoning ordinances. In the model, when governments choose zoning along with taxes and services, there does not exist an equilibrium that is both efficient and locally stable. Moreover, there exists an equilibrium in which governments over-zone and households overconsume housing. These findings challenge the Benefit View of the property tax. (JEL H71, H73, R52)