Capitalization of Property Taxes in Norway

Abstract

Capitalization of the property tax is of particular interest in Norway since many local governments decide not to have a property tax. We apply a rich data set of housing transactions and characteristics for three years (1997–1999) and combine them with local government-level data about property taxation, local services, and community characteristics. The analysis of capitalization faces serious methodological challenges of endogeneity and background factors affecting housing prices and local fiscal decisions. We investigate the relationship between property tax and housing prices using a variety of econometric specifications and using instruments for property taxation. The results indicate that housing prices respond to property taxation and with full capitalization at realistic discount rates. High child care coverage also contributes to high housing prices. The existence of capitalization effects suggests that housing markets reflect local fiscal conditions and that residential mobility is of importance to understand local government resource use.