Building homes for tax revenues? Spatial evidence on the fiscal effects of residential land development

This study quantifies the tax revenue effects of residential land development in Germany. Whereas existing research and policy debates have concentrated on the fiscal returns of commercial land expansion, the tax revenue effects of residential development remain largely unexplored. We estimate the impacts of increases in living space and settlement area on municipal tax revenues using spatial instrumental variable regressions and a nationwide cross-sectional dataset covering all German municipalities. Accounting for spatial spillovers and potential endogeneity, we document a significant positive effect of residential living space expansion on municipal income tax revenues, with substantial heterogeneity between urban and rural municipalities and across regions with differing economic performance. A corresponding analysis of broader settlement area expansion indicates similarly positive effects on total municipal tax revenues. Multiple robustness checks support the validity of these findings. Finally, we outline a simple framework for approximating the fiscal payback period of residential land development by relating estimated revenue effects to average municipal development costs.