Property taxation as compensation for local externalities: Evidence from large plants

Rebecca Fraenkel and Sam Krumholz

Journal of Public Economics, 2025, vol. 243, issue C

Abstract: Large scale industrial plants often create broad economic benefits, but impose harms on nearby residents. When local jurisdictions have control over land use, such plants may not be built absent sufficient compensation. In this paper, we study the extent to which large plants’ property tax payments compensate for local harms and whether local governments internalize these fiscal benefits when making decisions about local industrial development. We first demonstrate that the tax base impact of plant openings are economically large, lead to increases in local expenditures and reductions in local property tax rates, and are valued by local residents. We next show suggestive evidence that limiting local jurisdictions’ access to property taxation reduces the likelihood that they will contain large industrial plants. Together, these results suggest that increases in the local tax base are an important benefit of large externality-producing projects that are valued by residents and that local governments may internalize the fiscal impact of these plants when making development decisions.

Keywords: Power plants; Property tax; Fiscal decentralization; School finance equalization; Housing values; Coase theorem (search for similar items in EconPapers)
JEL-codes: H20 Q50 R30 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:243:y:2025:i:c:s0047272724002305

DOI: 10.1016/j.jpubeco.2024.105294

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