TAX STRUCTURE AND FISCAL ILLUSION IN INDIANA

SUSAN JEANNETTE PARKS, Purdue University

Abstract

It is apparent from the recent acceleration of tax and expenditure limitations at the local government level that there is a heightened concern over the size of the government sector. Efforts to constrain this growth by limiting the use of the property tax may actually create biases for further growth of the public sector if the resulting tax structure significantly alters taxpayers perceptions of their tax share. This study adapts the Borcherding/Deacon demand for government expenditures model to include an index for fiscal illusion or misperception of actual tax-prices by the median voter. The model is then applied to local expenditures in Indiana during a time period in which there was significant restructuring of the local tax base. Estimation of the model incorporated a series of cross-sectional equations, relative growth or first differencing equations, and a pooled cross-sectional time-series analysis. Although there was very little support for the fiscal illusion hypothesis in the cross-sectional or first-differencing equations, supportive results were obtained in the pooled-data version. Previous studies relating directly to the concept of fiscal illusion are few and present mixed results. This study was an attempt to improve both the operational definition of a index of fiscal illusion and its application to a set of relatively homogeneous local government units using both temporal and spatial data. In terms of support of the fiscal illusion hypothesis, the pooled data approach conforms most closely with the assumptions required by the model and the conceptual development and are therefore considered to be the strongest.

Degree

Ph.D.

Subject Area

Finance

COinS