Fiscal Effects of Municipal Annexation: Evidence from a Large National Sample of Urban Municipalities

This paper examines the relationship between annexation and municipal finance and addresses a gap in the literature by studying the role of revenue structure and fiscal constraints. Using a large national sample of urban municipalities, the analysis shows that territorial expansion by itself does not influence municipal fiscal outcomes with the exception of large single parcels annexations which increase spending. We also observe negative effects of population changes on revenues and spending per capita. Since population changes typically accompany annexation, we conclude that annexing cities tend to use their added tax base to spread the revenue burden more widely rather than to increase the size of government. An important implication of this study is that state-imposed fiscal constraints do not hamper annexation success and that comprehensive urban development policies may be needed to accommodate growth and development after annexation.