Tax Limits, Houses, and Schools: Seemingly Unrelated and Offsetting Effects

Abstract

Property tax limitations, as well as other tax and expenditure restrictions on state and local governments in the United States, date back to the late nineteenth century. A surge in property tax limitation legislation occurred in the late 1970s and early 1980s, and its effects on government revenue, school financing, and educational quality have been studied extensively. However, there is surprisingly little literature on how property tax limits affect housing markets. For the first time, we examine the impacts of property tax limitations on housing growth, in addition to their impacts on housing prices. Using state-level data over twenty-three years, we find that property tax limits increase housing prices (indexes) by approximately 1.6%. These limits appear to have little impact on the growth in the housing stock, as measured by the number of permits. Our evidence suggests that this is because while property tax limits reduce property taxes they also increase the price of housing. These two counteracting effects lead to ambiguous impacts on the gross price of housing.