Cap and Gap: The Fiscal Effects of Property Tax Levy Limits in New York

Abstract This is the first study to examine the fiscal effects of the New York property tax levy limit, using variation from the degree of fiscal stringency across school districts and over time in its first five years of implementation. Based on a difference-in-differences estimator, coupled with an event study specification, we find that the tax limit has imposed a real cap on many school districts; that is, at-limit districts’ total current expenditures per pupil are significantly lower than what they would have spent absent the limit. For those affected school districts, this expenditure gap does not come from spending on teacher salaries or fringe benefits but rather from other instructional salaries/expenses, central administration, transportation, interfund transfers, and undistributed spending. We also find heterogeneity in the constraining effects of the tax limit across different need-based groups of school districts.