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The Effect of Three-rate Property Taxation on Housing Construction

  • Teemu Lyytikäinen

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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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 419.

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Date of creation: 03 May 2007
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Handle: RePEc:fer:dpaper:419
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  1. Richard Arnott & Petia Petrova, 2002. "The Property Tax as a Tax on Value: Deadweight Loss," Boston College Working Papers in Economics 532, Boston College Department of Economics.
  2. Myoung-Jae Lee & Satoru Kobayashi, 2001. "Proportional treatment effects for count response panel data: effects of binary exercise on health care demand," Health Economics, John Wiley & Sons, Ltd., vol. 10(5), pages 411-428.
  3. Geoffrey K. Turnbull, 2002. "Land Development under the Threat of Taking," Southern Economic Journal, Southern Economic Association, vol. 69(2), pages 290-308, October.
  4. Capozza, Dennis & Li, Yuming, 1994. "The Intensity and Timing of Investment: The Case of Land," American Economic Review, American Economic Association, vol. 84(4), pages 889-904, September.
  5. Richard Arnott & Frank D. Lewis, 1977. "The Transition of Land to Urban Use," Working Papers 267, Queen's University, Department of Economics.
  6. Zax Jeffrey S. & Skidmore Mark, 1994. "Property Tax Rate Changes and Rates of Development," Journal of Urban Economics, Elsevier, vol. 36(3), pages 314-332, November.
  7. Hausman, Jerry & Hall, Bronwyn H & Griliches, Zvi, 1984. "Econometric Models for Count Data with an Application to the Patents-R&D Relationship," Econometrica, Econometric Society, vol. 52(4), pages 909-38, July.
  8. Arnott, Richard, 2000. "Neutral Property Taxation," Berkeley Program on Housing and Urban Policy, Working Paper Series qt27h7789n, Berkeley Program on Housing and Urban Policy.
  9. Mayer, Christopher J. & Somerville, C. Tsuriel, 2000. "Residential Construction: Using the Urban Growth Model to Estimate Housing Supply," Journal of Urban Economics, Elsevier, vol. 48(1), pages 85-109, July.
  10. Wooldridge, Jeffrey M., 1999. "Distribution-free estimation of some nonlinear panel data models," Journal of Econometrics, Elsevier, vol. 90(1), pages 77-97, May.
  11. Plassmann, Florenz & Tideman, T. Nicolaus, 2000. "A Markov Chain Monte Carlo Analysis of the Effect of Two-Rate Property Taxes on Construction," Journal of Urban Economics, Elsevier, vol. 47(2), pages 216-247, March.
  12. Turnbull, Geoffrey K., 1991. "A comparative dynamic analysis of zoning in a growing city," Journal of Urban Economics, Elsevier, vol. 29(2), pages 235-248, March.
  13. Anderson, John E, 1999. "Two-Rate Property Tax Effects on Land Development," The Journal of Real Estate Finance and Economics, Springer, vol. 18(2), pages 181-90, March.
  14. Page Marianne, 1995. "Racial and Ethnic Discrimination in Urban Housing Markets: Evidence from a Recent Audit Study," Journal of Urban Economics, Elsevier, vol. 38(2), pages 183-206, September.
  15. McFarlane, Alastair, 1999. "Taxes, Fees, and Urban Development," Journal of Urban Economics, Elsevier, vol. 46(3), pages 416-436, November.
  16. Geoffrey Turnbull, 2005. "The Investment Incentive Effects of Land Use Regulations," The Journal of Real Estate Finance and Economics, Springer, vol. 31(4), pages 357-395, December.
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