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Real Estate Taxes and Home Value: Winners and Losers of TCJA

Author

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  • Wenli Li
  • Edison Yu

Abstract

In this paper, we examine the impact of changes in the federal tax treatment of local property taxes 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 capping the federal tax deduction of real estate taxes at $10,000 has caused the growth rate of home value to decline by an annualized 0.8 percentage point, or 15 percent, in areas where real estate taxes as shares of taxable income exceeded the national median. Additionally, these areas with a high real estate tax burden suffered from reductions in market liquidity after the reform. Fewer houses were transacted either in absolute numbers or as shares of total listings, houses stayed on the market longer before being sold, and more houses were listed with price cuts. 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.

Suggested Citation

  • Wenli Li & Edison Yu, 2020. "Real Estate Taxes and Home Value: Winners and Losers of TCJA," Working Papers 20-12, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:87706
    DOI: 10.21799/frbp.wp.2020.12
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    References listed on IDEAS

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    Cited by:

    1. Brent W. Ambrose & Patric H. Hendershott & David C. Ling & Gary A. McGill, 2022. "Homeownership and taxes: How the TCJA altered the tax code's treatment of housing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(5), pages 1167-1200, September.

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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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