The Effect of Three-rate Property Taxation on Housing Construction
This paper examines the effect on housing construction of taxing undeveloped residential land at a higher rate than developed land. In 2001, Finnish municipalities were allowed to levy an extra property tax on undeveloped land zoned for housing. The aim of the reform was to encourage housing construction. As of 2007, almost 30 percent of municipalities had implemented the new three-rate tax system with different tax rates on land pre development, land post development and buildings. The remaining municipalities have a two-rate system with a uniform land tax and a building tax. A theoretical model of decisions by landowners under the Finnish-type three-rate system suggests that pre-development land tax ought to lead to faster development, but also the density of development may be affected. Municipality-level panel data for the period 1998?2006 are used in this study to estimate the effect of the predevelopment tax on housing starts. Fixed-effects Poisson estimations suggest that adopting the three-rate property tax system increased single-family housing starts annually by roughly 10 percent on average. The size of new single-family units is not affected. However, the results for all housing starts provide some evidence that development density might have decreased, attenuating the effect of faster development.
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