How does local autonomy shape the revenues of small municipalities? Evidence from Illinois home rule municipalities

Abstract

Although long governed by “Dillon’s Rule” that makes localities a “creature” of the state, the U.S. municipalities have always desired some degree of local autonomy. One of the ways in which states grant autonomy to local governments is through a designation of “home rule.” Most prior studies of the effects of home rule on local governance have focused on relating large municipalities. This article explores the effect of adopting home rule on small municipalities by looking at municipalities’ revenues. Focusing on Illinois municipalities, this article conducts a fuzzy regression discontinuity design to provide causal evidence. The empirical evidence shows that the adoption of home rule has a positive and statistically significant impact on the level of total own-source revenue, especially for local sales taxes and other taxes, but it has limited influence on property taxes. In addition, while home rule significantly increases revenue diversification for small municipalities, it has little influence on revenue stability.