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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

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.

Suggested Citation

  • Lutz, Byron & Molloy, Raven & Shan, Hui, 2011. "The housing crisis and state and local government tax revenue: Five channels," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 306-319, July.
  • Handle: RePEc:eee:regeco:v:41:y:2011:i:4:p:306-319
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    References listed on IDEAS

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    1. Case Karl E. & Quigley John M. & Shiller Robert J., 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-34, May.
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    4. Giertz, J. Fred, 2006. "The Property Tax Bound," National Tax Journal, National Tax Association, vol. 59(3), pages 695-705, September.
    5. 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.).
    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 555-572, September.
    7. Zephyr, 2010. "The city," City, Taylor & Francis Journals, vol. 14(1-2), pages 154-155, February.
    8. Daniel H. 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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