This document summarizes a research study that uses a synthetic control method to estimate the effect of Minnesota's tax-base sharing program on fiscal disparities in the Twin Cities metropolitan region. The study constructs a synthetic control region without tax-base sharing from other metropolitan areas to compare outcomes to the Twin Cities region and estimate the causal impact of the program. Key findings from previous literature suggest the program alleviated fiscal disparities but local tax competition still exists. The study aims to provide a more rigorous analysis of the program's effects using the synthetic control methodology.

1. Revisiting the Tax Base Sharing Program
in the Twin Cities Metropolitan Area:
A Synthetic Control Analysis
Soomi Lee (University of La Verne)
Weijie (Jeff) Yang (University of La Verne)
October 6, 2018
ABFM’s 30th Research Conference, Denver, CO

2. Purpose
• Estimate the effect of the tax-base
sharing program on municipal fiscal
disparities in the Twin Cities Region
(MN).
• Establish a causal relationship using a
synthetic control method.

3. Fragmented Governance in
Metropolitan Areas
• The average metropolitan area has 114
local governments (Rosan 2016).
• Damaging local fiscal competition for tax
base: inefficient land use, urban sprawl,
and fiscal inequities (Orfield 2007,2009,
2011; Benner and Pastor 2015; Hendrick
and Shi 2015).

4. Suggested Solutions?
Less Political Fragmentation!
• Annexation, Consolidation, and
• Regional governance:
– Current policy proposals focus on regional
provision of selected public services.
– E.g. LA’s Measure M and H. The Bay Area’s
Measure AA.
– Unclear how effective they are to address fiscal
competition and fiscalization of land use.

5. Tax-Base Sharing
• A mechanism through which all residents
of the area share the fiscal benefits of
growth and development (Smith 1979).
• The nation’s first experience with tax
base sharing: the Twin Cities Region (MN,
1971).

6. The Fiscal Disparities Program
• In 1971, the Fiscal Disparities Act was
adopted in the Twin Cities Region (the
Minneapolis-St. Paul metropolitan area).
• In 1975, it was formally implemented.
• In 1995, Iron Range joined the program.

7. The Region

8. Goals
1. Share resources produced by growth of the area.
2. Make orderly development by reducing
competition for tax base.
3. Work within existing system of local
governments.
4. Give incentives for all to work for growth of
seven county metro area as a whole.
5. Help communities in different stages of
development and redevelopment.
6. Encourage environmental protection.

9. Details
Tax Base Sharing
• Each municipality shares
40% of growth of its
industrial and commercial
property taxes.
• 1971 is the base year.
• Contribution=(Current
year property tax
capacity-base year
property tax capacity)*0.4.
Redistribution
• The funds are
redistributed based on a
formula—Distribution
Index
• Population*Fiscal
Capacity
– Contributors: Fiscal Capacity >
Average fiscal capacity
– Receivers: Fiscal Capacity <
Average

10. Direct Effects of the Program
• The Metropolitan Council: in 2016, $373
million in tax base was redistributed.
• Compared to 1971, reduced the fiscal
gap from 50:1 to 12:1.
• School districts get $2 million capital
improvement with fiscal disparities.
• Overall tax reduction is $5 million.

11. Literature on the Effect
• Fiscal disparities alleviated (Reschovsky
1978, 1981; Smith 1979; Orfield 2007)
• Local competition still exists (Goetz 1993).
• Works well for the region, but is unclear
whether it works for other regions (Fisher
1982; Bell 1987).
• Effects on land use patterns, urban sprawl,
and environmental protection unknown.

12. Empirical Strategy: A Case Study
Using Synthetic Control Method
• The case: the Fiscal Disparities Program in the
Twin Cities Region.
• Challenge: a lack of a suitable comparison
unit.
• Synthetic control method constructs the unit
using regions without the program—donor
pool (Abadie and Gardeazabal 2003; Abadie et
al. 2010; Abadie et al. 2012)

13. Effect of the Fiscal Disparities Program
𝜶𝟏𝒕 = 𝒚𝟏𝒕
𝑰
− 𝒚𝟏𝒕
𝑵
= 𝒚𝟏𝒕 − 𝒚𝟏𝒕
𝑵
• 1=Twin Cities Region, t=year.
• 𝜶𝟏𝒕: the effect of tax-base sharing
• 𝑦1𝑡
𝐼
: outcome with the intervention
• 𝑦1𝑡
𝑁
: outcome without intervention

14. Constructing 𝑦1𝑡
𝑁
• Predict the Twin City Region’s pre-
intervention trend as closely as possible by
using predictors from the regions (i)
without the intervention.
• Find weights w* that best predict the pre-
intervention trend.
• Use w* to predict its post-intervention
behavior.

15. 𝛼1𝑡 = 𝑦1𝑡 −
𝑖=2
𝑖+1
𝑤𝑖
∗
𝑦𝑖𝑡

16. Data
• 1950-2000 (intervention, 1975)
–25 years pre-intervention
–25 years post-intervention
• Donor pool: 30 regions
–Never adopted tax-base sharing
–Population > one million in 1975

17. Variables
• Outcome variables
–Fiscal disparities
–Potentially: a land use pattern, income
differences, urban sprawl, etc.
• Predictors
–Population growth, income growth,
number of cities/towns

18. Challenges
• Data sources
–US Census Bureau: County and the City
Data Books and Government Finance
• Plans
–Visit each regions and go back to the
1950s data? Reduce the number of
regions in the donor pool?

19. Questions and Suggestions
Soomi Lee, slee4@laverne.edu
Jeff Yang, weijie.yang@laverne.edu