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Real Estate Taxes and Home Value: Evidence from TCJA

Author

Listed:
  • Wenli Li

    (Federal Reserve Bank of Philadelphia)

  • Edison Yu

    (Federal Reserve Bank of Philadelphia)

Abstract

We examine the impact of changes in the federal tax treatment of owner-occupied housing stemming from the implementation of the Tax Cuts and Jobs Act (TCJA) in January 2018 on local housing markets. Using county-level house price information and IRS tax data, we find that, holding everything else the same, capping the federal tax deduction of state and local taxes at $10,000 has caused the growth rate of home value to decline by an annualized 0.9 percentage point, or 18 percent, in areas where real estate taxes as shares of taxable income exceeded the national median. The results are robust when controlling for other changes in the tax reform. The areas with a high real estate tax burden also suffered from reductions in market liquidity after the reform. Fewer houses were transacted either in absolute numbers or as shares of total listings and houses stayed on the market longer before being sold. Importantly, we find that the housing market slowdown was accompanied by declines in local construction employment growth as well as multi-family building permits. Furthermore, on net more people moved out of these areas after the reform. Finally, we show that the act has already had political consequences. In the 2018 midterm Senate elections, more voters voted for Democratic candidates in areas with high real estate tax burden than they did for Republican candidates. (Copyright: Elsevier)

Suggested Citation

  • Wenli Li & Edison Yu, 2022. "Real Estate Taxes and Home Value: Evidence from TCJA," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 43, pages 125-151, January.
    • Handle: RePEc:red:issued:20-215
    DOI: 10.1016/j.red.2021.02.003
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    Cited by:

    1. Donald Bruce & Lawrence M. Kessler, 2022. "A SALT on Real Estate? Housing Market and Migration Responses to the Limit on the State and Local Tax Deduction," Working Papers 2022-01, University of Tennessee, Department of Economics.

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    More about this item

    Keywords

    Real estate tax; Home value; Housing liquidity;
    All these keywords.

    JEL classification:

    • R0 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis
    • G1 - Financial Economics - - General Financial Markets

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