Property Taxes and the American Dream: New Discoveries

Abstract

Low homeownership rates among young Americans pose a critical problem. Even in the aftermath of the 2007-2008 financial crisis, homeownership remains a stable source of wealth acquisition and continues to provide valuable future financial security. This thesis explores whether property tax policy can help young Americans reverse their recent shift towards renting, and achieve the American dream of homeownership.

Drawing on past literature which views property tax payments as reductions in the economic value of owning a house, I hypothesize that higher property tax rates create incentives for older homeowners to eventually sell their home. The current climate of property tax limitation laws, exemplified by California’s Proposition 13, may be reducing the supply of homes available, and creating an even tougher housing market for future homebuyers. I test this hypothesis by analyzing the impact of property taxes in the United States on four outcomes: home values, housing turnover, demographic composition, and productivity. Whereas previous studies analyzing the impact of property taxes on the housing market confined themselves to localities, this is the first study of its kind to investigate the relationship of property taxes to these outcomes on a national level.

Using county-level data across two five-year time periods, 2006-2010 and 2011-2015, and employing a mixture of two-stage and ordinary least squares regression techniques, I find property taxes are significantly related to lower house prices, increased housing turnover, a younger demographic composition, and increased productivity. In short, all else equal, higher property taxes lead to a more dynamic housing market with younger, more productive individuals able to buy homes in communities with good local services.

Though the harms of property tax limitation laws go beyond just hampering the housing market as they help reinforce societal inequities, the implications of this analysis do not entail simply raising property tax rates across the board. Instead, a more judicious use of property taxes through existing policy frameworks coupled with innovative solutions would not only be more helpful but also more politically feasible. Creating more targeted property tax relief and forming stronger implementation practices as well as exploring new ideas such as land value taxation, non-primary residence taxes, progressive property taxes, and downsizing subsidies may help make the American dream more of a reality for the next generation of Americans.