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Small Homes, Public Schools, and Property Tax Capitalization

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  • Ryan M. Gallagher
  • Haydar Kurban
  • Joseph J. Persky

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 does 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.

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File URL: ftp://ftp2.census.gov/ces/wp/2013/CES-WP-13-04.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 13-04.

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Length: 26 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:cen:wpaper:13-04

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  1. Geoffrey K. Turnbull & Jonathan Dombrow & C.F. Sirmans, 2006. "Big House, Little House: Relative Size and Value," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 34(3), pages 439-456, 09.
  2. David Brasington & Don Haurin, . "Educational Outcomes and House Values: A Test of the Value-Added Approach," Departmental Working Papers, Department of Economics, Louisiana State University 2005-03, Department of Economics, Louisiana State University.
  3. Quigley, John M. & Raphael, Steven, 2004. "Is Housing Unaffordable? Why Isn't It More Affordable?," Berkeley Program on Housing and Urban Policy, Working Paper Series, Berkeley Program on Housing and Urban Policy qt1vp9j3k0, Berkeley Program on Housing and Urban Policy.
  4. Cushing, Brian J., 1984. "Capitalization of interjurisdictional fiscal differentials: An alternative approach," Journal of Urban Economics, Elsevier, vol. 15(3), pages 317-326, May.
  5. Palmon, Oded & Smith, Barton A., 1998. "A New Approach for Identifying the Parameters of a Tax Capitalization Model," Journal of Urban Economics, Elsevier, vol. 44(2), pages 299-316, September.
  6. Sandra E. Black, 1997. "Do better schools matter? Parental valuation of elementary education," Research Paper, Federal Reserve Bank of New York 9729, Federal Reserve Bank of New York.
  7. Pollakowski, Henry O, 1973. "The Effects of Property Taxes and Local Public Spending on Property Values: A Comment and Further Results," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(4), pages 994-1003, July-Aug..
  8. Harris, Amy Rehder & Evans, William N. & Schwab, Robert M., 2001. "Education spending in an aging America," Journal of Public Economics, Elsevier, Elsevier, vol. 81(3), pages 449-472, September.
  9. Rosen, Harvey S & Fullerton, David J, 1977. "A Note on Local Tax Rates, Public Benefit Levels, and Property Values," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(2), pages 433-40, April.
  10. King, A Thomas, 1977. "Estimating Property Tax Capitalization: A Critical Comment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(2), pages 425-31, April.
  11. Wales, T J & Wiens, E G, 1974. "Capitalization of Residential Property Taxes: An Empirical Study," The Review of Economics and Statistics, MIT Press, vol. 56(3), pages 329-33, August.
  12. Oates, Wallace E, 1973. "The Effects of Property Taxes and Local Public Spending on Property Values: A Reply and Yet Further Results," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(4), pages 1004-08, July-Aug..
  13. Kurban, Haydar & Gallagher, Ryan M. & Persky, Joseph J., 2012. "Estimating Local Redistribution Through Property-Tax-Funded Public School Systems," National Tax Journal, National Tax Association, vol. 65(3), pages 629-51, September.
  14. Oded Palmon & Baron A. Smith, 1998. "New Evidence on Property Tax Capitalization," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(5), pages 1099-1128, October.
  15. Christian A. L. Hilber, 2011. "The Economics Implications of House Price Capitalization A Survey of an Emerging Literature," SERC Discussion Papers, Spatial Economics Research Centre, LSE 0091, Spatial Economics Research Centre, LSE.
  16. Oates, Wallace E, 1969. "The Effects of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 77(6), pages 957-71, Nov./Dec..
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Cited by:
  1. Zodrow, George R., 2014. "Intrajurisdictional capitalization and the incidence of the property tax," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 45(C), pages 57-66.

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