Estimating the value of the historical designation externality

Abstract

PurposeA long‐standing argument for historic preservation of houses has been the positive externalities that it produces. The purpose of this paper is to quantify the externality associated with the designation of historical houses in San Diego, California under the Mills Act.Design/methodology/approachThe Mills Act allows for individual houses to be designated as historically significant. This results in neighborhoods where historically designated houses are side‐by‐side with houses with no particular historic significance. The positive externality hypothesis predicts that the value of a house should be a function of the number of historically designated houses within the neighborhood. The proximity of historically designated houses on the sales price of other non‐historic houses is valued using hedonic regression analysis.FindingsThe results suggest that a house's value is increased by 3.8 per cent by having a historical house within 250 ft, and by 1.6 per cent by having a historical home located between 250 and 500 ft away. Under the Mills Act, property taxes are lowered on the historically designated properties, costing local governments tax revenues. Based on the results presented in this paper, the overall taxable basis for the neighborhood increases by $1.8 million for each historical home. Estimates are provided that show that local governments might expect a net tax revenue gain of US$14,000 per house per year.Originality/valueThe Mills Act is a market‐based approach to historic preservation. Homeowners are encouraged to pursue designation of their property for property tax reductions. This paper demonstrates that local governments also gain through this program through higher property tax revenues.