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The housing crisis and state and local government tax revenue: Five channels

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  • Lutz, Byron
  • Molloy, Raven
  • Shan, Hui
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Abstract

State and local government tax revenues dropped steeply following the most severe housing market contraction since the Great Depression. We identify five main channels through which the housing market affects state and local tax revenues: property tax revenues, transfer tax revenues, sales tax revenues (including a direct effect through construction materials and an indirect effect through the link between housing wealth and consumption), and personal income tax revenues. We find that property tax revenues do not tend to decrease following house price declines. We conclude that the resilience of property tax receipts is due to significant lags between market values and assessed values of housing and the tendency of policy makers to offset declines in the tax base with higher tax rates. The other four channels have had a relatively modest effect on state tax revenues. We calculate that these channels jointly reduced tax revenues by $22Â billion from 2006 to 2009, which is about 3% of total state own-source revenues in 2006. We conclude that the recent contraction in state and local tax revenues has been driven primarily by the general economic recession, rather than the housing market per-se.

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Bibliographic Info

Article provided by Elsevier in its journal Regional Science and Urban Economics.

Volume (Year): 41 (2011)
Issue (Month): 4 (July)
Pages: 306-319

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Handle: RePEc:eee:regeco:v:41:y:2011:i:4:p:306-319

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Keywords: State and local taxation Housing crisis Property tax Sales tax State income tax;

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References

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  1. Giertz, J. Fred, 2006. "The Property Tax Bound," National Tax Journal, National Tax Association, vol. 59(3), pages 695-705, September.
  2. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market," Berkeley Program on Housing and Urban Policy, Working Paper Series qt28d3s92s, Berkeley Program on Housing and Urban Policy.
  3. Orazio P. Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2009. "Booms and Busts: Consumption, House Prices and Expectations," Economica, London School of Economics and Political Science, vol. 76(301), pages 20-50, 02.
  4. Byron F. Lutz, 2008. "The connection between house price appreciation and property tax revenues," Finance and Economics Discussion Series 2008-48, Board of Governors of the Federal Reserve System (U.S.).
  5. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 2132-56, August.
  6. Lutz, Byron F., 2008. "The Connection Between House Price Appreciation and Property Tax Revenues," National Tax Journal, National Tax Association, vol. 61(3), pages 555-72, September.
  7. Zephyr, 2010. "The city," City, Taylor & Francis Journals, vol. 14(1-2), pages 154-155, February.
  8. Daniel Cooper, 2009. "Impending U.S. spending bust?: the role of housing wealth as borrowing collateral," Public Policy Discussion Paper 09-9, Federal Reserve Bank of Boston.
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Citations

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Cited by:
  1. Doerner, William M. & Ihlanfeldt, Keith R., 2011. "House prices and city revenues," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 332-342, July.
  2. Bhatt, Rachana & Rork, Jonathan C. & Walker, Mary Beth, 2011. "Earmarking and the business cycle: The case of state spending on higher education," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 352-359, July.
  3. Albert Solé-Ollé & Elisabet Viladecans-Marsal, 2011. "Local spending and the housing boom," Working Papers 2011/27, Institut d'Economia de Barcelona (IEB).
  4. Jian Chen & David H. Downs, 2013. "Property Tax and Tenure Choice: Implications for China," International Real Estate Review, Asian Real Estate Society, vol. 16(3), pages 323-343.
  5. Jiri Jonas, 2012. "Great Recession and Fiscal Squeeze at U.S. Subnational Government Level," IMF Working Papers 12/184, International Monetary Fund.
  6. Alm, James & Buschman, Robert D. & Sjoquist, David L., 2011. "Rethinking local government reliance on the property tax," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 320-331, July.
  7. Anderson, Nathan B., 2012. "Market value assessment and idiosyncratic tax-price risk: Understanding the consequences of alternative definitions of the property tax base," Regional Science and Urban Economics, Elsevier, vol. 42(4), pages 545-560.
  8. John Norregaard, 2013. "Taxing Immovable Property Revenue Potential and Implementation Challenges," IMF Working Papers 13/129, International Monetary Fund.
  9. Chernick, Howard & Langley, Adam & Reschovsky, Andrew, 2011. "The impact of the Great Recession and the housing crisis on the financing of America's largest cities," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 372-381, July.
  10. Ross, Justin M. & Yan, Wenli, 2013. "Fiscal Illusion From Property Reassessment? An Empirical Test Of The Residual View," National Tax Journal, National Tax Association, vol. 66(1), pages 7-32, March.
  11. Huang, MeiChi, 2014. "Bubble-like housing boom–bust cycles: Evidence from the predictive power of households’ expectations," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 2-16.
  12. Andrea Filippo Presbitero & Agnese Sacchi & Alberto Zazzaro, 2014. "Property Tax and Fiscal Discipline in OECD Countries," Mo.Fi.R. Working Papers 95, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.

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