Academic journal article International Advances in Economic Research

Property Taxation, Capitalization, and the Economic Implications of Raising Property Taxes

Academic journal article International Advances in Economic Research

Property Taxation, Capitalization, and the Economic Implications of Raising Property Taxes

Article excerpt

Abstract This study applies a hedonic pricing model to provide further empirical evidence whether, in the spirit of Tiebout (Journal of Political Economy 64(1):416 424,1956), Oates (Journal of Political Economy 77(6):957- 971, 1969), and Tullock .Journal of Political Economy 79(5):913-918, 1971), property taxes in particular have been capitalized into housing prices in the city of Savannah, Georgia housing market. There were sufficient data in this context to study a total of 2,888 single-family houses for the six-year period 2000-2005; 591 of these houses were located in the Savannah Historic Landmark District. Estimating the model in semi-log form reveals (after allowing for a variety of factors, including 12 spatial variables, four of which are de facto Tiebout type variables) that the natural log of the real sales price of a single-family house in the city of Savannah environment was in fact negatively affected by the city and county property tax level. This study is prompted by the fact that city and county governments are facing serious financial challenges and are searching for viable revenue sources. Increasing property taxes is one of the potential revenue sources being considered by elected officials. In providing current evidence on the effects of property tax in particular and on the Tiebout hypothesis in general, we seek to alert city and state governments of the potential consequences and perils of property tax hikes.

Keywords Housing prices Property tax capitalization Public goods capitalization

JEL R14 R13 R11


Since the meltdown of U.S. mortgage and credit markets, city, county, and state governments have been searching with an increasing sense of urgency for either new sources of revenue or means by which to expand existing sources of revenue. In the cases of city and county governments, property tax increases are a particularly tempting vehicle with which to attempt to elevate revenues since, at least in the short run, they have a captive audience (resident homeowners). The present study seeks to provide current evidence as to whether or not such increased property taxes would adversely affect housing prices. If such tax increases are in fact destined to be capitalized into housing prices, homeowners will be adversely impacted by a decline in their property values and hence a decline in their wealth. In turn, to the extent that higher property taxes reduce wealth, consumption spending can be expected to decline, bringing with it further upward pressure on unemployment rates and potential other distortions in resource allocation as well (Cebula and Alexander 2006). To help ensure more dependable results, Tiebout (1956) factors aside from just the property tax are also integrated into the analysis.

Hedonic pricing models have been used in a number of studies to assess the impacts of historic district designation and other factors on property values (Coffin 1989; Ford 1989; Asabere and Huffman 1994; Asabere et al. 1994; Clark and Herrin 1997; Coulson and Leichenko 2001; Leichenko et al. 2001; Coulson and Lahr 2005; Sirmans et al. 2005). This study seeks to extend the literature by applying the hedonic pricing model to the prices of single-family homes in the metropolitan area of Savannah, Georgia, with emphasis on the question of whether property taxes (and a variety of Tiebout (1956) type variables) are capitalized into housing prices. In addition to focusing upon the issue of whether property taxes (PROPTX) are capitalized into housing prices in the city of Savannah, this study considers four Tiebout (1956) type variables. These include: close proximity to public primary, middle, and secondary schools (SCHOOL); relatively close proximity to the city's two public universities; and relatively close proximity to the city's primary hospitals, which are in fact funded to some significant degree by state and local public revenues.

This study also accounts for a number of other factors influencing the housing market. …

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