This article has been reviewed according to Science X's editorial process and policies. Editors have highlighted the following attributes while ensuring the content's credibility: It's annual property tax collection season, and with it may come questions about how those property taxes are used and, if there's a tax increase, why. A new academic study suggests that when local governments collect more in taxes than their budgets require, some finance officials quietly use accounting tricks to make that extra money disappear from public view—not to save it for a rainy day, but to keep the taxes coming.
The research, led by Amanda Beck of Georgia State's Robinson College of Business, along with Xi Chen of the University of Bristol and Gilles Hilary of Georgetown University, examined more than a decade of financial records from over 2,100 U.S. cities and counties. Their conclusion: Municipal administrators appear to manipulate their own financial statements to downplay budget surpluses, particularly after property values—and the tax revenue that comes with them—rise. It sounds strange that anyone in government would want to hide good financial news.
But the researchers argue the incentives work in reverse. Surveys cited in the study show that only about 3% of local officials want to return a surplus to taxpayers through rebates or tax cuts, while roughly 20% of citizens say that's exactly what they'd prefer. A visible surplus gives residents ammunition to demand lower taxes, but for unelected administrators who run the day-to-day finances of a city or county, a surplus provides money that expands what they can do and, potentially, what they can earn.
"If the local government wants to raise property taxes, whether for reasons that are good for the community or selfish reasons like increasing their compensation, they're still more likely to get pushback if the community is aware there's a budget surplus, so they want to minimize that reporting to avoid that opposition," said Beck, associate professor in Robinson's School of Accountancy. To test their theory, the team built a large dataset combining municipal financial statements, housing price data from the Federal Housing Finance Agency, and information on local politics, union membership and government oversight structures, spanning 2005–2013. They tracked two forms of accounting discretion, which are legal but flexible choices in how a government reports its finances.
One involves shifting money between different funds; the other involves adjustments buried in accrual accounting, like how a government estimates unpaid taxes or pension costs. Both offer administrators room to make a surplus look smaller than it really is. "Accounting judgments can be really hard to make, but you shouldn't make them based on a reporting outcome you're trying to achieve," said Beck.
"For example, if you're trying to decide the life of a building and how to report depreciation expenses, whether you're trying to report a deficit or surplus on this year's financials shouldn't have any bearing on that decision." The researchers looked at these accounting choices to see if there was a connection between growth in housing values, which often results in increased property tax revenue, and a rise in government manipulation of revenue numbers to make them appear lower. "Governments want to capture those property value increases as taxes, but there are laws that prevent them from doing that when citizens oppose it. So officials need to be able to justify raising those property taxes," said Beck.
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