A computable general equilibrium analysis of a statewide fiscal reform: The case of Michigan's 1993-1994 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" 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's 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's 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 ;Taxpayers who itemize on federal taxes decreased from 33 percent to 30 percent. This increased the community's "tax price" of public goods financed through property taxes by 2.52 percent. Overall welfare improved after the reform.;Recent developments in Michigan's economy are generally consistent with the above findings.