Municipal tax restrictions and economic efficiency: an analysis of Australian local councils

ABSTRACT

This paper analyses the impact of rate capping policy on local council efficiency. It also examines a set of exogenous factors associated with local government efficiency. A semi-parametric framework based on data envelopment analysis is applied to construct an efficient frontier for Victorian local governments. Findings indicate that rate capping policy had no significant effect on the overall economic efficiency of Victorian local governments. Furthermore, the policy appears to have an adverse effect on the efficiency of metropolitan councils during the study period. The heterogeneity of local governments needs to be considered when setting rate caps.

KEYWORDS:

• municipal performance
• data envelopment analysis
• double-bootstrap
• rate capping
• municipal tax

JEL:

• B16
• D61
• H44
• H83

ACKNOWLEDGEMENTS

The authors are grateful to colleagues who provided useful feedback on the paper at the 2020 School of Business and Law Seminar Series, CQ University. Any remaining errors are the responsibility of the authors.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

Notes

1. The term ‘rate capping’ characterizes a state government imposing municipal tax restrictions on local governments by announcing a maximum tax rate (a cap) that can be collected from residents for a given period. This paper uses the terms ‘municipal rates’ and ‘property tax’ interchangeably.

2. Australia has six states (New South Wales, Victoria, Queensland, South Australia, Western Australia and Tasmania) and two territory governments (Australian Capital Territory, and Northern Territory & Norfolk Islands).

3. NSW has been using a form of rate capping (or ‘rate pegging’ as it referred in the state) since the 1970s. South Australia and Northern Territory temporarily applied rate capping in 1997–99 and 2007–10, respectively.

4. As part of this initiative, the state government maintains a dedicated website called ‘Know Your Council’ summarizing performance indicators for 79 Victorian local governments. The website allows citizens to make comparisons between similar councils on 11 service categories.

5. See Lopez et al. (2020) for a comprehensive review of local government efficiency.

6. Bootstrap is a general computer-based data simulation method where it mimics the distribution of the original dataset to generate a sample of replicates (usually about 2000), which can be used for statistical inference.

7. For a comprehensive review of the variables used in local government efficiency analysis, see Da Cruz and Marques (2014).

8. The household size data were obtained from the Australian Bureau of Statistics’ (ABS) National Regional Profile 2010–2014, and it is assumed that this will remain constant for the study period.

9. LGV emphasizes that the commentary provided alongside data should be considered in analyses and reporting, and some data may change as councils may need to update their performance data ahead of their annual reporting. LGV also discourages publishing any simplistic league tables of councils.

10. ‘Fully efficient’ councils may also have inefficiencies as DEA is a relative performance measure.

11. These efficiency estimations are only comparable because of the same model specification used.