Do State-funded Property Tax Exemptions Actually Provide Tax Relief? Georgia’s HTRG Program

Abstract

We examine the effect of a state-funded property tax homestead exemptions on the burden of property taxes. This class of exemptions is characterized by a grant from the state to local governments that is intended to replace the reduction in property tax revenue due to the exemption. The median voter model predicts that part of the homestead exemption will be used to increase expenditures. In addition, fiscal illusion could reduce the effectiveness of this type of grant in lowering the tax burden. We test these predictions for the Georgia’s Homeowner’s Tax Relief Grant program by separately using panels of county-level data and school system data. We find that over one-third of funds transferred to counties through this program are used to increase revenues rather than provide tax relief. We find evidence of possible fiscal illusion for school systems.