A New Approach for Identifying the Parameters of a Tax Capitalization Model

Abstract

This study re-estimates property tax capitalization rates with two empirical innovations. First, the underidentification problem inherent in all capitalization studies is resolved using estimates of rental values instead of estimates of the net user cost. Second, the methodology along with the utilization of a unique data set mitigates biases resulting from potential correlations between property tax rates and unobservable amenities or public services. The extent of tax capitalization estimated here is greater than estimates reported in many recent studies and is statistically indistinguishable from full capitalization. The study also provides insights regarding the variability of the net user cost of housing.