Measuring Disparities in Non-School Costs and Revenue Capacity Among Massachusetts Cities and Towns

This paper develops new measures of environmental costs and local revenue capacity (that is, the ability of local governments to raise revenue), in order to form the basis of a new general-purpose aid formula for Massachusetts cities and towns. On the cost side, unlike previous studies, our research focuses on local non-school spending, quantifying the effects of uncontrollable-cost-related characteristics while controlling for the impacts of school responsibilities, available resources, and preferences. On the revenue capacity side, our research focuses on accounting for the constraints of a tax limitation, for the first time in the literature. We use data on recent taxing patterns to develop an exogenous measure of the effective constraints, which we model as a function of residents' incomes, and we use that measure to adjust the size of the local property tax base in measuring revenue capacity. Based on the estimated costs and revenue capacity, we find substantial inter-local fiscal disparities among Massachusetts cities and towns. Our approach is potentially applicable to other states facing similar challenges