Opting in with the Joneses: What Affects the Timing of Municipal Adoption of a Local-option Meals Tax? 
States authorize local-option taxes to promote local revenue diversification, improve local fiscal health, and reduce local reliance on property taxes. These taxes are also employed by local governments to offset state aid losses. Despite these benefits, the speed with which local governments adopt a local-option tax can vary widely. Some localities adopt the tax immediately once the state makes it available; others wait longer; and some never adopt it. This paper uses the local-option meals tax in Massachusetts as a case study to examine the factors that affect the timing of local adoptions.
Key Findings
- A municipality is likely to adopt a local-option tax sooner if more neighboring cities and towns have adopted one.
- If a municipality faces greater fiscal stress due to a smaller per capita property tax base—as is often the case with densely populated cities—or from a larger percentage cut in per capita state aid, it is likely to adopt a local-option tax sooner.
- A municipality is likely to adopt a local-option tax sooner if it can raise a larger amount of revenue from the tax, or if it can shift a larger share of the tax burden to commuters, tourists, and other non-residents.
- Municipalities with a representative town meeting are likely to adopt a local-option tax sooner than municipalities with an open town meeting, which is consistent with the former facing a lower barrier to pass a vote approving the new tax.
Implications
States use local-option taxes to promote local revenue diversification and improve local fiscal health. However, many sub-state governments wait a long time before adopting local-option taxes or do not adopt them at all, which seems puzzling or even irrational upon first glance. This paper uses the local-option meals tax in Massachusetts as a case study to examine the factors that affect the timing of local adoptions. It finds significant positive results for adoption by neighboring municipalities, which are robust to a variety of specifications, neighbor definitions, and weighting matrices. The adoption hazard also increases if a municipality faces greater fiscal stress, such as being more constrained by a property tax limitation or receiving a larger cut in state aid. In addition, the form of local government, size of the meals tax base, and ability to export the tax to non-residents are important factors.
Abstract
States use local-option taxes to promote local revenue diversification and improve local fiscal health. However, many sub-state governments wait a long time before adopting local-option taxes or do not adopt them at all, which seems puzzling or even irrational upon first glance. This paper uses the local-option meals tax in Massachusetts as a case study to examine the factors that affect the timing of local adoptions. It finds significant positive results for adoption by neighboring municipalities, which are robust to a variety of specifications, neighbor definitions, and weighting matrices. The adoption hazard also increases if a municipality faces greater fiscal stress, such as being more constrained by a property tax limitation or receiving a larger cut in state aid. In addition, the form of local government, size of the meals tax base, and ability to export the tax to non-residents are important factors.