Truth and illusion: can a transparency reform contribute to accountable taxing behaviour?

During property reassessment, local governments can take advantage of taxpayer uncertainty to raise property taxes with less public scrutiny–a form of so-called ‘fiscal illusion’. To address this phenomenon, North Carolina passed a law in 2003 requiring governments to publicly report their deviation from the revenue-neutral tax rate. We estimate the effect of this transparency reform on the extent of fiscal illusion in property taxes to understand the relationship between transparency and accountability. Using a difference-in-differences approach with county government data from 1990 to 2018, we find that counties increase property tax levies during property reassessment years, on average setting them 7.2 percent point higher than during non-reassessment years. We find that the 2003 transparency reform gradually reduced the amount of fiscal illusion and thereby contributed to more accountable taxing behaviours of governments.