Title

Intrajurisdictional property tax capitalization rates

Date of Award

1996

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Public Administration

Advisor(s)

John M. Yinger

Keywords

property tax, effective tax rates, Syracuse

Subject Categories

Public Administration

Abstract

At its core this study asks, at what rate are effective property tax rate differences capitalized into house values in the City of Syracuse, New York. Knowing what helps determine property tax capitalization rates may become of increasing interest as local governments begin to increasingly rely on the property tax due to deliberate reductions in the size and scope of federal government transfers.

There already exists a large number of property tax capitalization studies. With few exceptions, these studies contain statistical flaws, and find surprisingly low rates of property tax capitalization. In addition, many of the studies employ severely restrictive assumptions when specifying a functional form, and frequently use the wrong tax variable.

The objective of this study is to offer an explanation for why estimated property tax capitalization rates are often so low. To that effect, this study estimates the capitalization rate of the present value of expected effective property tax rate differences, not the capitalization rate of current tax rate differences. This study also--for the first time--includes buyer specific variables in the house value equation. This is done in because buyer specific attributes are thought to systematically alter property tax capitalization rates, and their omission from previous studies has caused those studies to miss much of the property tax capitalization phenomenon.

The study proceeds as follows. First, a theoretical justification for the inclusion of several buyer specific variables in the house value estimating equation is offered. Second, justification for estimating the capitalization rate of the present value of expected property tax rate differences--as opposed to current tax rate differences--is provided. Third, a house value equation incorporating these additions is developed. Lastly, estimates are presented.

This research finds that capitalization rates are explained by buyer specific variables. Buyers who are credit constrained have capitalization rates that are significantly higher than unconstrained buyers, while buyers who deduct property taxes from their taxable income have capitalization rates that are progressively lower the higher their marginal income tax bracket. Most interestingly, buyers who take the standard deduction, and who are credit constrained, are found to have property tax capitalization rates of about 100%.

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