The Fiscal Capitalization of Public Spending: Does Municipal Operating and Capital Spending Increase Property Values?

This study investigates the impact of local public spending on property values. The theory of fiscal capitalization, first proposed by Charles Tiebout and Wallace Oates, holds that a positive relationship exists between local public spending and property values. The theory posits that individuals and businesses make locational decisions based on their preferences for a community’s mix of taxes and spending on services. Although an extensive literature exists supporting fiscal capitalization, studies rarely investigate the separate effects of operating versus capital expenditures. Furthermore, few studies have investigated whether a distinct capitalization effect exists between the signal created by ongoing capital expenditures and a longer term amenity effect realized once projects are completed. This article extends the fiscal capitalization theory by assessing these distinctive effects on property values. The study uses a border discontinuity research design, limiting the sample to residential properties near municipal boundaries. The results show capital and operating expenditures have different effects on property values. In addition, the spending on capital improvements has short-term and long-term effects in the property market. The findings provide local policymakers with guidance on the relative benefits of operating versus capital spending when balancing the two choices.