Impact of Property Taxes and Public Education Outlays on Housing Costs: Recent Empirical Evidence

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ABSTRACT

This empirical study investigates the impact of property taxes, public education outlays, and other factors on interstate differentials in the cost of housing. While the literature on geographic cost-of-living differentials is well developed, the literature on geographic cost-of-housing differentials is much less so Housing costs consist of the price of housing per se for owners (including maintenance and repairs) or rental payments per se for renters .Relevance of this research is elevated by the fact that the cost of housing is the main driver of cost-of-living differences between states. OLS results imply that the cost of housing is positively a function of median family income, miles of shoreline, and the mean January temperature, and negatively a function of toxic waste releases and the presence of right-to-work laws. Finally, it is found that property taxes are capitalized into housing prices, thereby lowering those prices and the overall cost of housing, as it is narrowly defined, whereas there is modest evidence that public education outlays may also be capitalized into housing prices, thereby elevating the cost of housing.

INTRODUCTION

Determinants of geographic living-cost differentials (L-CDs) in the U.S has attracted the interest of a large number of researchers, including Cebula (1980, 1989), Cebula & Todd (2004), Cobas (1978), Ostrosky (1983), McMahon (1991), Nord (2000), and Kurre (2003). The study of geographic L-CDs is of interest given that such differentials have consistently been found to be significant in explaining geographic mobility in the U.S. (Renas, 1978, 1983; Cebula, 1978, 1993; Cebula & Alexander, 2006; Ashby, 2007). Most of the published L-CD related research to date has tended to focus on states, metropolitan areas, or counties.

Less well developed is the literature on interstate housing-cost differentials per se. Based on the database adopted in this study, housing costs consists of two components: (1) the housing price (for homeowners), inclusive of home maintenance and repair costs, and (2) the housing price for renters, i.e., rent per se. Outlays on residential housing constitute approximately 40 percent of total expenditures by households. As Ashby (2007, p. 686) observes, "...housing...is the main driver of cost-of-living differences between states." Hence, improved knowledge of determinants of housing-cost differentials per se may shed at least indirect light on the underlying causes of interstate living-cost differentials. Accordingly, the objective of this study is to identify determinants of interstate differentials in the cost of housing (as defined). This study focuses on interstate housing-cost differentials for the year 2006.

THE CONTEXT

The analysis adopts state-level data, with Washington, D.C. being excluded. To begin the development of the framework for the analysis, it is hypothesized that the higher the median family income (MFI^sub j^), the greater the overall demand for housing and hence the higher the overall level of housing prices and rents, ceteris paribus. Hence, the overall cost of housing in state j, COHj, is expected to be an increasing function of MFI^sub j^, ceteris paribis. In principle, this argument is consistent with previous research (Cebula & Todd, 2004; Cobas, 1978; Ostrosky, 1983; Kurre, 2003) that has found that the average overall price level in a regional economy responds positively to an increase in per capita income, the effects of which are transmitted to regional price levels through an increase in the overall demand for goods and services.

The housing prices (and rent levels) comprising the overall cost of housing, COH, are likely to be significantly influenced by environmental considerations. To begin, the roles of a more favorable climate and/or other positive environmental amenities have been shown to be determinants of migration that may be capitalized in housing prices (Cebula, 1978; Cebula & Alexander, 2006). …