The Effect of Property Tax Limitations on Residential Private Governments

The growth in the formation of residential private governments to fund and deliver public finances coincided with a period in which local governments faced voter-imposed property tax limitations. Popular commentary suggests that a major reason of the rise of these private governments, found in planned developments and condominiums, is a municipal response to property tax limitations. This paper asks whether the imposition of a property tax limitation leads to the formation and proliferation of residential private governments. It begins with a theoretical model that illustrates how a property tax limit on a local government can affect the private government membership margin. The theoretical implications are then tested with data from California in the era of Proposition 13. Using panel data methods, the empirical model tests whether or not cities that were more property-tax constrained experienced higher rates of private government formation. The study controls for changes in demographic composition and other determinants of city budgets. Results are consistent with property tax limitations being a driving force in increasing the level of private government membership and, more importantly, the number of incorporations of private governments in a city.