Education
Finance
and Accountability
Program
(EFAP)
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John Yinger Director |
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William Duncombe Associate Director |
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Jerry Miner Senior Associate |
Ross Rubenstein Senior Associate |
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Robert Bifulco Senior Associate |
Notes on the Incidence of the Property Tax
Trustee Professor of Public Administration and Economics
These notes review the basic analysis of
property tax incidence and present on recent
result on the incidence of the property tax on
rental housing.
An analysis of property tax incidence must
address the following three types of
questions.
I. The question first asked by scholars was:
"Who bears the burden of a nationwide
property tax (or, equivalently) of the average
property tax rate?"
A. The traditional view, based on an analysis of the markets for individual types of property, leads to the conclusion that the burden of the property tax is regressive. In particular, business owners, who have many options, are able to escape the burden of the tax; that is, they are able to shift it onto consumers, workers, and renters, who have lower incomes, on average, than property owners.
B. The new view, based on a general equilibrium analysis of all markets, leads to the conclusion that the burden of the tax is progressive. Because the amount of property (or physical capital) is fixed at any given time, the owners of property cannot alter their behavior in response to the tax and therefore are stuck with the burden.
C. The new new view points out that property owners might be able to change the amount of property over time, either through investment decisions or through international capital flows. This "correction" implies that the new view may be too extreme, but does not alter the conclusion that a large share of the burden is likely to fall on property owners.
II. The next development in the
literature was the recognition that the
traditional view and the new view are not
really incompatible, but are instead
appropriate for different questions.
A. The traditional view seems appropriate for determining the incidence of a property tax increase in one community, holding property taxes in other communities constant. In this case, national prices and totals are not affected, but economic actors can move from one jurisdiction to another in order to escape the tax increase. Thus, several scholars have concluded, the burden of a property tax increase in one jurisdiction, such as a big city, is likely to be very regressive.
B. The new view (or the new new view) seems appropriate for determining the incidence of the property tax nationwide. Overall, therefore, most scholars agree that the property tax as a whole is progressive. This conclusion is not linked to any particular policy choices, but it is relevant for determining the extent to which a federal system should should rely on local property taxes.
III. The final complication is that property tax changes may be capitalized into property values. This has important implications for the second incidence question above, namely who bears the burden of a tax change in one jurisdiction relative to others.
A. The first implication of capitalization is that property owners may not be able to escape a tax increase, even if they have opportunities elsewhere. If tax changes are capitalized into property values, then owners bear the burden of the tax if they stay (and pay higher taxes) or leave (and experience a capital loss).
B. The second implication is that any incidence analysis has a new distinction, namely between owners at the time a tax change is announced and future owners. This distinction does not correspond to the categories in previous incidence analysis (such as owners, consumers, workers, and renters or rich and poor).C. The third implication is that the conclusion from traditional incidence analysis, namely that property tax increases in one jurisdiction have a regressive impact, may no longer be true. With capitalization, the burden falls on current property owners, who have relatively high incomes. Of course, the burden only falls on a subset of high-income people, namely high-income owners of property in the jurisdiction where taxes go up, not on all high-income people. Moreover, many property owners in a particular jurisdiction may not be residents of that jurisdiction. For example, they could be corporate shareholders who live around the country or landlords who live in nearby jurisdictions. When there is capitalization, therefore, the exact pattern of incidence could be quite complex.
An Application to Rental Housing
In one case, namely rental housing, one paper
that accounts both for traditional incidence
analysis and capitalization (Carroll and
Yinger, National Tax Journal, 1994)
actually estimates the extent to which
property owners can shift taxes onto tenants.
This is the easiest case to study, because tax
shifting must take the form of higher rents.
As a result, one can estimate the extent to
which higher taxes in one jurisdiction are
shifted onto tenants by determining whether
rents are higher in jurisdictions with higher
tax rates, all else equal.
If renters are fairly mobile, as seems likely,
landlords cannot simply raise rents when
property taxes go up. After all, higher
property taxes alone do not make an apartment
more desirable to a tenant, and mobile tenants
will respond to a rent increase by moving.
However, tenants will pay higher rents if they
receive better public services, which form
part of the benefits from living in a
particular place. Public services and tax
rates are not, of course, perfectly
correlated. Some jurisdictions face high costs
in providing public services, for example, and
therefore must raise taxes more than other
places to obtain the same public-service
improvement. Nevertheless, a property tax
increase does lead to some increase in the
quality of public services. Thus, landlords
can shift a property tax increase to tenants
only to the extent that this increase is
associated with better public services.
Using data for communities in the Boston area,
Carroll and Yinger estimate that a $1.00
increase in property taxes results in a rent
increase of only about $0.15, on average, even
if the underlying supply curve for housing is
very elastic (that is, even if landlords have
many options). In the average community,
therefore, landlords bear about 85% of the
property tax burden. The burden on landlords
varies across communities, depending on the
cost of public services, among other things,
but the landlord share is above 75% in every
community. This study cannot observe the
incomes or residential locations of landlords,
but it implies that tenants, who almost
certainly have lower average incomes than
landlords, bear a relative small share of the
burden of a property tax burden increase.
Thus, the usual conclusion from traditional
incidence analysis, namely that tenants are
likely to bear a large share of the burden of
a property tax increase, is not correct, at
least not in the Boston area.
This result for rental housing may not carry
over to other types of property. Property tax
increases for commercial and industrial
property, for example, may be shifted to a
greater or lesser degree than those on rental
property. Moreover, in the case of
owner-occupied housing, capitalization simply
adds a new dimension to the incidence
analysis. The burden of a property tax
increase still is likely to have a regressive
impact, because higher-income owners spend a
smaller share of their income on housing than
do lower-income owners, but now the burden
falls entirely on owners who own at the time
the tax increase is announced, not on future
owners -- a distinction not recognized in
traditional incidence analysis.
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