Effects of the property tax on operating and investment decisions of rental property owners: An empirical test

Abstract

A model of landlord behavior presented in DeSalvo (1971) is combined with the bid curve of Rosen (1974) to yield the hypothesis that, in the stationary state, a reduction in the property tax rate will lead housing capital to rise unambiguously and housing's current input either to rise or fall. Since the theory only predicts the directions of change in the inputs, the magnitudes of these changes are estimated with the result that a ten percent reduction in the tax rate will lead capital to rise by 0.6 percent and the current input by 4.9 percent, both at the one percent significance level. Thus, if, as DeSalvo suggests, upgrading is defined as a rise in capital, the null hypothesis that upgrading will not occur with a fall in the property tax rate must be rejected at the one percent level.