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The housing crisis and state and local government tax revenue: five channels

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Listed:
  • Byron F. Lutz
  • Raven S. Molloy

    (Board of Governors of the Federal Reserve System (U.S.))

  • Hui Shan

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 $15 billion from 2005 to 2009, which is about 2 percent of total state own-source revenues in 2005. 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

  • Byron F. Lutz & Raven S. Molloy & Hui Shan, 2010. "The housing crisis and state and local government tax revenue: five channels," Finance and Economics Discussion Series 2010-49, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2010-49
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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.
    2. Orazio P. Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2009. "Booms and Busts: Consumption, House Prices and Expectations," Economica, London School of Economics and Political Science, vol. 76(301), pages 20-50, February.
    3. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 2132-2156, August.
    4. Giertz, J. Fred, 2006. "The Property Tax Bound," National Tax Journal, National Tax Association;National Tax Journal, 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.), revised 2008.
    6. Lutz, Byron F., 2008. "The Connection Between House Price Appreciation and Property Tax Revenues," National Tax Journal, National Tax Association;National Tax Journal, 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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    Keywords

    Real property and taxation; Income tax;

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