The Incentive Effects of the Minnesota Fiscal Disparities Program on Tax Policy in Minnesota

Abstract

In this work, we provide a theoretical analysis and empirical evidence of the incentive effects of the tax base sharing program on property tax rates set by municipalities in the Twin Cities metropolitan area. We identify two incentive effects generated by this program: the equalization base effect and the revenue matching effect, and test their combined impact on local property tax rates. Our empirical analysis shows that cities and townships respond to the combined impact of these two effects by raising their property tax rates while counties and school districts do not.