Geographic Differentials in Property Tax Rates: a Test of the Backward Shifting Hypothesis

Abstract

The hypothesis that local rates of property taxes levied on the value of industrial property may be shifted backward onto labor is formulated and tested with inferences drawn from a sample of labor market areas in Michigan. The analysis is carried out in the context of a two-factor production fuaction for property and labor, for two goods, home and export Products, in a two-sector world comprising the differentially taxed community and all other communities. No a priori assumption about the direction of the backward shifting effect is made. The regression analysis suggests that labor in the differentially taxed area is not burdened by an onerous local property tax charge. Rather wages tend to be higher, the higher the net property tax differential, in labor market areas comprised of firms possessing extensive market power.