A computable general equilibrium analysis of a statewide fiscal reform: the case of Michigan\u27s 1993-3 property tax reform

A computable general equilibrium model analyzes the tax effects of simultaneously reducing property taxes by 44 percent and increasing the rate of sales taxation from four to six percent in Michigan in 1994. The dissertation fills the void in the literature for empirical regional computable general equilibrium models. It adds some numerical flesh to the existing general equilibrium analytical frameworks by Courant (1977) Henderson (1985), McLure (1969) and Kimbell, Shih and Shulman (1979). Most analytical frameworks use the New View theory of property tax incidence where property taxes, in an economy with fixed capital, are profit-taxes on capital rather than taxes on other inputs or output. The latter are affected indirectly through excise tax effects. The dissertation uses the New View\u27\u27 theory in the context where one jurisdiction (Michigan) unilaterally lowers its property tax while other states hold their rates fixed. The profits-tax effect cannot occur in this case because Michigan is relatively a small jurisdiction. Instead, excise-tax effects occur when capital flows to Michigan to keep Michigan\u27s after-tax price of capital at par with the national price. Capital inflows are modeled as a function of input elasticities of substitution; input share proportions; and property tax differentials. Michigan\u27s 1990 gross state product is used as the benchmark data. Results show a 1.09 percent increase in housing services; a 0.07 percent increase in the composite good; a 2.08 percent increase in housing land rents; a 0.53 percent increase in composite good land rents; a 0.51 percent increase in the housing industry wages; a 0.08 percent increase in the composite industry wages, and a 1.03 percent average increase in quantity of capital inflows. The price of the composite good is the numereire and the price of housing services decreases by -0.52 percent. Property values increase by 2.65 percent. The effective increase in property tax and sales tax bases are not enough to offset the decrease in the property tax revenues. Taxpayers who itemize on federal taxes decreased from 33 percent to 30 percent. This increased the community\u27s \u27\u27tax price of public goods financed through property taxes by 2.52 percent. Overall welfare improved after the reform. Recent developments in Michigan\u27s economy are generally consistent with the above findings