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State and Local Public Finance Spring 2013, Professor Yinger. Lecture 8 Property Tax Incidence. State and Local Public Finance Lecture 8: Property Tax Incidence. Class Outline Who Bears the Burden of the Property Tax? The Traditional , New , and New New Views

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State and Local Public FinanceSpring 2013, Professor Yinger

Lecture 8

Property Tax Incidence


State and Local Public FinanceLecture 8: Property Tax Incidence

Class Outline

  • Who Bears the Burden of the Property Tax?

    • The Traditional, New, and New New Views

  • Accounting for Variation in the Property Tax Across Jurisdictions

    • Including the Role of Property Tax Capitalization

  • Property Tax Incidence and Public Policy


State and Local Public FinanceLecture 8: Property Tax Incidence

Property Tax Incidence

  • The first question in property tax incidence is:

    • Who bears the burden of a nationwide property tax (or, equivalently) of the average property tax rate?

  • Three answers have appeared:

    • The Traditional View

    • The New View

    • The New New View


State and Local Public FinanceLecture 8: Property Tax Incidence

  • The Traditional View, based on an analysis of the markets for individual types of property, concludes that the property tax is regressive.

    • Business owners, who have many options, can escape the burden of the tax, and shift it onto consumers, workers, and renters.

    • Because business owners have relatively high incomes, this shifting makes the tax regressive.


P

P2

S+tax

P1=P3

S

D

Q

Product markets (commercial &

industrial property is an input)

or the rental housing market.

State and Local Public FinanceLecture 8: Property Tax Incidence

  • The Traditional View focuses on the behavior of responsive firms with property as an input:


P

S

P1=P2

tax

P3

D

Q

The land market

State and Local Public FinanceLecture 8: Property Tax Incidence

  • Even in the Traditional View, the property tax on land is progressive:


State and Local Public FinanceLecture 8: Property Tax Incidence

  • For single-family houses, the Traditional View depends on the income elasticity of demand for housing (θ):

  • To see why, note that:


State and Local Public FinanceLecture 8: Property Tax Incidence

  • An examination of the national average tax holds t/r constant, so

    • T/Y increases with income if θ >1

    • T/Y decreases with income if θ <1

  • There is a strong consensus that θ < 1, so T/Ydecreases with income and this portion of the tax is regressive.


State and Local Public FinanceLecture 8: Property Tax Incidence

  • The New View is based on a general equilibrium analysis of all markets.

  • A property owner cannot escape a tax in one market if the same tax is levied everywhere.

  • Since almost all property is taxed, property owners cannot escape the tax.

  • Because property owners have relatively high incomes, the property tax is progressive.


S

i

i1

tax

i2

D

Burden on owners of K

K

State and Local Public FinanceLecture 8: Property Tax Incidence

  • In effect, the New View assumes the supply of property in the nation (K) is fixed:


State and Local Public FinanceLecture 8: Property Tax Incidence

  • The New New View points out that the amount of property might respond to interest rates over time

    • through investment decisions

    • or through international flows in financial capital.

  • This "correction" implies that the New View may be too extreme, but concludes that most of the burden is still likely to fall on property owners.


S-R S

i

(L-R S)+t

L-R S

i2

i1

tax

L-R burden on consumers/workers

i3

tax

L-R burden on owners of K

i4

D

S-R burden on owners of K

K

State and Local Public FinanceLecture 8: Property Tax Incidence

  • The New View (S-R) and the

    New-New View (L-R)


State and Local Public FinanceLecture 8: Property Tax Incidence

Other Questions

  • Some scholars say that the Traditional View and the New Viewaddress for different questions.

  • The Traditional View

    • This view applies to the incidence of a property tax increase in one place, holding property taxes in other places constant.

    • In this case, property owners can move from one place to another to escape the tax increase.

    • Thus, the burden of a property tax increase in one place, such as a big city, may be regressive.


State and Local Public FinanceLecture 8: Property Tax Incidence

  • The New View or the New New View

    • These views seems appropriate for the incidence of the property tax nationwide.

    • Thus, most scholars agree that the property tax as a whole is progressive.

    • This conclusion is relevant in deciding the extent to which a federal system should rely on local property taxes.


State and Local Public FinanceLecture 8: Property Tax Incidence

The Benefit View

  • A final view of the property tax incidence is the Benefit View.

    • In this view, the property tax is simply the price a household pays to live in a community.

    • Households live where this price equals their benefits from the public services, so the property tax is fair according to the benefit principle.


State and Local Public FinanceLecture 8: Property Tax Incidence

  • The Benefit View implies that there will be no capitalization:

    • If households all select their optimal community, they have no reason to bid up the price of housing anywhere else.

  • The extensive evidence of capitalization therefore leads to a clear, unambiguous rejection of the Benefit View.


State and Local Public FinanceLecture 8: Property Tax Incidence

Capitalization and Incidence

  • Capitalization implies that property owners cannot 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)


State and Local Public FinanceLecture 8: Property Tax Incidence

  • Capitalization also implies 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).


State and Local Public FinanceLecture 8: Property Tax Incidence

  • Capitalization also implies that a key conclusion of the Traditional View, namely, that property tax increases in one jurisdiction are regressive, may not be correct.

  • With capitalization, the burden falls on current property owners, who have relatively high incomes.

  • Moreover, many property owners in a particular jurisdiction may not be residents, but may instead be:

    • corporate shareholders who live around the country

    • landlords who live elsewhere.


State and Local Public FinanceLecture 8: Property Tax Incidence

  • In the case of rental housing, some evidence on these points is provided by Carroll and Yinger (NTJ, June 1994).

  • Tax shifting from landlords to tenants must take the form of higher rents.

  • C&Y estimate the extent to which higher property taxes lead to higher rents in the Boston area, all else equal.


P

S+tax

S

P1=P2

D

tax

P3

Q

The rental housing market

(within an urban area)

State and Local Public FinanceLecture 8: Property Tax Incidence

  • Higher property taxes alone do not make an apartment more desirable to a tenant, so in the case of mobile tenants:


State and Local Public FinanceLecture 8: Property Tax Incidence

  • However, tenants will pay higher rents if they receive better public services.

  • Thus, landlords can shift a property tax increase to tenants only to the extent that this increase leads to better public services.

  • The question is: To what extent does this type of shifting occur?


State and Local Public FinanceLecture 8: Property Tax Incidence

  • C&Y estimate that a $1.00 increase in property taxes results in a rent increase of about $0.15, on average, which implies that landlords bear about 85% of the property tax burden.

  • Thus, the conclusion from the Traditional View, namely, that tenants bear a large share of the burden of a property tax increase, is not correct, at least not in the Boston area.


State and Local Public FinanceLecture 8: Property Tax Incidence

Property Tax Incidence

and Public Policy

  • All views of property tax incidence say that taxes on homeowners are regressive.

  • Voters want programs to cut this regressivity.

    • Voters are particularly concerned about elderly homeowners.


State and Local Public FinanceLecture 8: Property Tax Incidence

  • Graduated property tax rates are possible (e.g. Minnesota) but do not make sense for nonresidential property.

    • The issue is regressivity across people, not across businesses.

    • A business with a small factory may be owned by a very rich person!

  • So states turn to circuit breakers and homestead exemptions


State and Local Public FinanceLecture 8: Property Tax Incidence

  • A circuit breaker provides a tax break (often through the income tax) if a person’s property tax payment exceeds a given share of their income.

  • Design


State and Local Public FinanceLecture 8: Property Tax Incidence

  • Popularity

    • About half of the states have circuit breakers for elderly homeowners or elderly renters.

    • A few states have circuit breakers for all homeowners or all renters.

    • For details, go to http://www.lincolninst.edu.

  • Strengths

    • Circuit breakers provide tax relief for people who have a hard time paying property taxes out of their income.


State and Local Public FinanceLecture 8: Property Tax Incidence

  • Weaknesses

    • Circuit breakers help many home owners who do not need help.

      • Empty-nesters with a valuable house can borrow against their equity.

      • The circuit breaker just protects their children’s inheritance!

    • Circuit breakers for all taxpayers lower tax prices and have unintended consequences.

    • Circuit breakers cannot be given to renters without an implicit analysis of property tax incidence!


State and Local Public FinanceLecture 8: Property Tax Incidence

  • Homestead Exemptions

  • Design

    • The formula:

    • May or may not involve reimbursement by the state


State and Local Public FinanceLecture 8: Property Tax Incidence

  • Popularity

    • Almost all states have some form of homestead exemption.

    • Most states have special exemptions, usually for the elderly or veterans.

    • Several states have general exemptions

    • A few states reimburse local governments for the exemptions

    • For details, go to http://www.lincolninst.edu.


State and Local Public FinanceLecture 8: Property Tax Incidence

  • Strengths

    • Homestead exemptions cut the regressivity of the property tax on homeowners.

  • Weaknesses

    • Reimbursed homestead exemptions lower tax prices and have unintended consequences.

    • Homestead exemptions cannot be given to renterswithout an implicit analysis of property tax incidence!


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