This paper develops new measures of environmental costs and local revenue capacity as the basis for a new municipal aid formula in Massachusetts. On the cost side, unlike previous studies, we quantify the effects on local non-school spending of characteristics related to uncontrollable costs. On the capacity side, we account for the constraints of a tax limitation, for the first time in the literature, by estimating these constraints as a function of residents’ incomes. The estimates of costs and capacity indicate substantial inter-local fiscal disparities in Massachusetts. Our approach is potentially applicable to other states.
Also released as New England Public Policy Center Working Paper No. 06-3.
This paper was revised in May 2007.
Keywords: fiscal disparities, municipal costs, revenue capacity, property tax, state aid, tax limitation
JEL Classifications: H70, H71, H72, H73, H77, H83, H20