Small homes, public schools, and property tax capitalization

Ryan M Gallagher,Haydar Kurban,Joseph J Persky

doi:10.1016/j.regsciurbeco.2013.01.001

Abstract

Efforts to estimate the degree to which local property taxes are capitalized into house values are complicated by any spurious correlation between property taxes and unobserved public services. One public service of particular interest is the provision of local public schools. Not only do public schools bulk large in the local property tax bill, but the inherent difficulty in measuring school quality has potentially undermined earlier attempts at achieving unbiased estimates of property tax capitalization. This particular problem has been of special concern since Oates' (1969) seminal paper.We sidestep the problem of omitted or misspecified measures of school quality by focusing on a segment of the housing market that likely places little-to-no value on school quality: small homes. Because few households residing in small homes have public school children, we anticipate that variations in their value do not account for differentials in public school quality. Using restricted-access microdata provided by the U.S. Census, and a quasi-experimental identification strategy, we estimate that local property taxes are nearly fully capitalized into the prices of small homes.

Highlights

Empirical efforts to measure the capitalization of local property taxes are greatly complicated by the challenges of controlling for public benefit levels
For those concerned with measuring school quality these difficulties must be addressed directly. For those attempting to measure the capitalization of property taxes, the best strategy is to identify quasi-experiments that hold local public service levels constant, while allowing tax rates to vary
This study suggests that focusing on education taxes and small homes provides a convincing approach for estimating the rate at which property taxes are capitalized into home values

Summary

Introduction

Empirical efforts to measure the capitalization of local property taxes are greatly complicated by the challenges of controlling for public benefit levels. For small homes, observing inter-jurisdictional variation in school district property taxes, while controlling for other taxes and public services, will offer unique insights into the nature and degree of property tax capitalization For this stratum of the housing market, educational property taxes are essentially direct transfers to households with children in the public schools. To the extent that these services are unobserved and correlated with school district taxes, estimates of property tax capitalization will be biased To minimize this potential problem, the present study incorporates a border discontinuity design similar to that used by Black (1999) and Bayer, Ferreira, & McMillan (2007, hereafter BFM).

Identification Strategy

Estimation Results

Conclusion and Discussion

Estimating the Home Values

Estimating Effective School District Tax Rates