Local governments in the United States have long relied on special assessments to fund the provision of goods and services.[1] The assessment is a halfway house between the ad-valorem property tax that pays for public goods, such as schools or highways, and an individual charge or fee for service that pays for individual goods, such as for sewerage or electricity; they are parcel taxes levied on neighborhoods for club goods, such as park construction or street lighting. In many locales, parcel taxes depend not on the value of a property but instead are proportional to the expected benefit that would be accrued to the property.[2]

Since both their benefits and costs are targeted, assessments were useful fiscal implements for 19^th century American cities that were faced with the task of rapid expansion. Citizens demanding an excludable but shared good, such as parking, street lighting, or green-space maintenance, would petition a local government for an assessment levy.[3] This practice, however, has changed in the past few decades. With the imposition of tax limitations in many states, including many that specifically limit ad valorem property taxes, assessments have been increasingly leveraged by municipalities to fund public goods formerly paid for by property tax collections, such as schools, fire prevention, parks, water and sewerage.[4]

Typically, districts are drawn to bound the assessment and its targeted benefits. The drawn boundaries need not conform to preexisting political or social boundaries. These districts are passed via weighted vote of the affected property owners. This has allowed more affluent neighborhoods to wall themselves off from others and, additionally, has adverse effects on the traditionally perceived delegations between citizens and their representatives.

The Logic of Fragmentation

Why do municipal governments seek to fragment themselves?

Much of our understanding of local government finance comes from economic models of supply of and demand for public goods. As an example, the famous Tiebout Hypothesis indicates that voters will “vote with their feet” and move to locations that offer a bundle of goods, services and taxes that match their demand.[5] This is rarely the case in practice, however, as moving is both costly and difficult, and credible information covering all the dimensions of life in other locations is limited. Where sorting does not occur, governmental creation of a perfect price discriminating monopoly for the provision of public goods is preferable to exit, both for citizens and for the governments themselves.[6] How large, diverse, modern cities end up being built is through the use of assessments, whereby blocs of citizens can build their own little corner of their city to match their demand for public, club, and individual goods.

I provide an extended model of supply and demand for public provisions. Cities offer large menus of goods and services. Voter demand for any good or service is rarely constant across an entire city, since cities are often segmented by family status, income, race, age, and ethnicity, with similar peoples living and working near each other. Different neighborhoods will then exhibit different willingness-to-pay for various government goods and services. Further, demand for government goods and services is rarely static and, often, certain segments of the citizenry will demand different amounts and types of goods at different times. By creating a scattering of districts to provide goods and services targeted at neighborhood level demand, municipal governments can more closely approximate the behavior of price-discriminating monopolists. This allows for two favorable outcomes. First, it enables the maximum extraction of possible rents, since each individual is assessed in closer accordance to their own willingness-to-pay. Second, it is politically favorable since it prevents governments from levying general tax increases that the median voter would reject due to their limited geographical reach or high expense. Thus, municipal fragmentation inevitably decreases social and economic deadweight loss. As a result, cities that would otherwise face dissolution via mass exit can persist by changing their targeted menus of goods and services.

Democracy and Delegation

The problem is, however, with how these special assessment districts are created, funded, and overseen. Assessment districts are created through special property-owner elections that often operate through special rules. First, a benefit engineer polls the populace to estimate willingness-to-pay, calculates the assessed benefit, and draws the district. Then, it is determined what fraction of the benefit from this good or service each property owner is expected to receive. The assessment is then put to an election, wherein each property-owner’s vote is weighted in accordance with their share of the benefit. This electoral structure is open to many abuses. These elections can be, and often are, held at advantageous times. Districts can be drawn to exclude potential no-votes. Because ballots are weighted, they cannot be secret.

Further, because corporations can own property and receive benefits from assessments, they are given direct electoral presence. These corporations, which may not even be headquartered within the state or even the U.S., may cast a ballot while other residents, such as renters, cannot. As an example, the Yerba Buena Community Benefit District in San Francisco passed with 82.96% of the vote despite a majority of property owners in the district voting against its passage. The Marriott Hotel within the district was levied the largest assessment and their yes-vote was weighted at roughly 600 times the value of the average individual voter.[7] This effectively transforms municipal elections from “one man, one vote” to “one dollar, one vote”.

Another side-effect of this municipal government structure is greater segregation. As a result of the unique electoral design, assessments can be used to price out low-income residents or business owners from certain neighborhoods, encouraging municipal segregation. This is the case in New York City where Building Improvement District levies, such as those in Queens around Roosevelt Avenue, have been used to price out low-income shops and street vendors who cannot afford to pay the annual assessment.[8]

Further, assessment proliferation works to sever the principal-agent relationship between citizens and their institutions. Because these districts are specialized to serve specific functions, citizens are often placed into many different overlapping districts with different jurisdictional responsibilities while collecting different assessments that are placed into different accounts. These districts can overlap in ways such that citizens can be in separate sets of districts from even their next-door neighbors, leaving little by way of reference points for effective monitoring action. The density of these financial networks erodes government taxing accountability and can prevent citizens from casting informed votes in future elections.

ENDNOTES

[1] For the purposes of this entry, the term “special assessments” includes not only traditional tax assessments, but also special financing methods that are district based, such as Building Improvement Districts and Community Facilities Districts. Each of these taxing entities shares a similar developmental process, electoral structure, and benefit calculation.

[2] For an example, see County of Fresno v. Malmstrom 1979.

[3] For road paving, assessments were levied according to the measured length of property abutting the road. Modern assessments are levied in a similar fashion, although the benefit calculation is performed by a “benefit engineer” who is often independent of the government.

[4] See Daniel R. Mullins and Bruce A. Wallin, 2004. Tax and Expenditure Limitations: Introduction and Overview in Public Budgeting and Finance 24:4 p. 2-15.

[5] See Charles M. Tiebout, 1956. A Pure Theory of Local Expenditures in The Journal of Political Economy 64, p. 416-424

[6] See Albert O. Hirschman, 1970. Exit, Voice, and Loyalty by Harvard University Press: Cambridge, MA.

[7] See David Kirk, 2008. How the Voting Works in the Yerba Buena CBD Blog. http://ybcbd.blogspot.com/2008/09/how-voting-works.html

[8] See Julie Turkewitz, 2013. In Queens, Balking at Change, Even if it’s Called Improvement in The New York Times. http://www.nytimes.com/2013/11/08/nyregion/in-queens-balking-at-change-even-if-its-called-improvement.html.

The preceding post comes to us from Colin McCubbins, a Research Scientist in Political Science and Law at Duke University. The post is based on his recent article, which is entitled “Local Government Fragmentation, Finance, and Accountability” and available here.