Working Paper 06-19
by Katharine Bradbury and Bo Zhao

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

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