Property Taxes and Community Stability

June 28, 2005

For years, polls have shown people dislike local property taxes more than any other tax. Now, a new NBER working paper shows the way property taxes are collected may also have strong effects on community stability (abstract here).

The paper explores how California's Proposition 13—a property tax limitation passed in 1978—affects homeowners' decisions of whether to hold or sell housing. Prop 13 caps property tax increases by only allowing home assessments to rise by 2 percent per year. However, home values are reassessed when sold. That means in a market with rising housing prices, Prop 13 provides home owners with incentives to move less often—which some have interpreted as providing stability to communities. From the paper:

In this paper, we test the lock-in effect of Prop 13 on California owners and renters. We find that, holding everything else constant, from 1970 to 2000 the average tenure length of owners and renters in California increased by 1.04 years and .79 years, respectively, relative to the increases in average tenure length of the same groups in other states...

In 1992, the U.S. Supreme Court upheld Proposition 13, in part on the grounds that it furthered the policy goals of increasing “local neighborhood preservation, continuity, and stability.” Our results suggest that Prop 13 definitely furthered continuity and stability, since it caused a substantial increase in the average tenure length of California households relative to that of households in other states.

Read the full paper here.

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