The fiscal externality of multifamily housing and its impact on the property tax: Evidence from cities and schools, 1980–2010

Negative fiscal externalities produced by apartments and other small housing units are commonly cited as the justification for many local land-use restrictions, such as minimum lot requirements and limits on multifamily developments. Because these laws effectively limit the number of small dwellings that can be built within a community, proponents argue that restrictions of this type help to guarantee that new homes will “pay for themselves” by discouraging free-riding behavior within a system of property tax funded local governments. Critics, however, have maintained that such policies constitute a veiled attempt by suburban communities at restricting entry for low-income families. Focusing on the clear distinction between housing units located in multifamily structures (i.e., apartments) and single-family homes, this paper finds strong evidence that residential per-capita values, measured as value per person and value per child, are actually higher for apartments, not single-family residences. Consequently, communities' effective property tax rates decline as apartments' share of the housing stock rises, holding all else equal. These findings are contrary to the set of assumptions that are often used to justify many of today's land-use restrictions and raise serious questions regarding the efficacy of modern fiscal zoning as a tool for promoting efficient fiscal federalism.