خانه های کوچک، مدارس دولتی و سرمایه گذاری های مالیات بر اموال

Efforts to estimate the degree to which local property taxes are capitalized into house values are complicated by any spurious correlation between property taxes and unobserved public services. One public service of particular interest is the provision of local public schools. Not only do public schools bulk large in the local property tax bill, but the inherent difficulty in measuring school quality has potentially undermined earlier attempts at achieving unbiased estimates of property tax capitalization. This particular problem has been of special concern since Oates' (1969) seminal paper. We sidestep the problem of omitted or misspecified measures of school quality by focusing on a segment of the housing market that likely places little-to-no value on school quality: small homes. Because few households residing in small homes have public school children, we anticipate that variations in their value do not account for differentials in public school quality. Using restricted-access microdata provided by the U.S. Census, and a quasi-experimental identification strategy, we estimate that local property taxes are nearly fully capitalized into the prices of small homes.

Empirical efforts to measure the capitalization of local property taxes are greatly complicated by the challenges of controlling for public benefit levels. The early approach to this problem was to include tax rates and various measures of service levels in a hedonic analysis of housing prices.1 But achieving adequate controls for public services in such hedonic equations has proven to be extremely difficult. The extent, quality, and location of all potentially relevant public services are not easily measured. Chief among these hard to quantify characteristics are the dimensions of public school quality. Recent attempts to estimate willingness to pay for public school characteristics (Black, 1999, Bayer et al., 2007 and Gibbons et al., 2009) have generated a wide range of results that relied on a various proxies for school quality. For those concerned with measuring school quality these difficulties must be addressed directly. But for those attempting to measure the capitalization of property taxes, the best strategy is to identify quasi-experiments that hold local public service levels (and quality) constant, while allowing tax rates to vary. Palmon and Smith, 1998a and Palmon and Smith, 1998b construct an interesting quasi-experiment of this type by limiting observed variation in home values and taxes to those that occur across a select number of municipal utility districts (MUDs) operating within the unincorporated sections of Harris County, TX (northwest of Houston). With the exception of schooling, many public services are evenly supplied to all households in their sample by either the county or by the MUDs themselves.2 However, due to historical accidents, the effective rate of property taxation is not equal across MUDs. Thus, while holding most public services constant, there are observed variations in property taxes. Taking advantage of this unique circumstance, Palmon & Smith estimate rates of property tax capitalization near 100%, suggesting that effective property tax differentials may be a major determinant of home price differentials. The use of MUDs to measure inter-jurisdictional tax differentials represents a major improvement over earlier identification strategies that were unable to explicitly hold many public services constant across jurisdictions.3 However, in light of recent methodological developments, it is worthwhile to reexamine property tax capitalization within the context of an identification strategy that provides even further controls for potentially endogenous fiscal variables. For example, beginning with Cushing (1984) and Black (1999), it is now a standard practice within the home price capitalization literature to control for the “neighborhood” within which homes on either side of a jurisdiction fall. This is because homes in close proximity to one another are more likely to benefit from the same level of unobservable and spatially localized public services (e.g., public parks). Failure to control for public services of this kind will bias any estimates of tax capitalization if the services in question are correlated with tax rates. For example, a MUD's tax rate is a direct function of its subdivisions' levels of completion. This is because less-complete subdivisions (i.e., fewer homes than initially intended) will need relatively high residential property tax rates to finance debt payments. However, because less-complete subdivisions are also more likely to have fewer developed parks, failure to control for neighborhood fixed effects may bias property tax capitalization estimates. Palmon & Smith's estimates are also potentially complicated by their failure to control for public school characteristics which, although perhaps similar in some respects, as they note, may vary along many difficult-to-measure dimensions (e.g., value added, accountability, pupil-to-teacher ratios, etc.) that are thought to be valued by the housing market. To the extent that these factors are correlated with inter-jurisdictional tax differentials, estimates of property tax capitalization will be biased. This issue has plagued much of the housing price capitalization literature for years, primarily due to the difficulty and debate surrounding appropriate measures of perceived school quality.4 We make no attempt at improving upon these measures of perceived school quality. Rather, in recognition of the many difficulties inherent in measuring school quality, we look to sidestep this complication altogether by focusing on a segment of the housing market that pays public school property taxes but presumably places little-to-no value on the level of public school services provided: small homes. For example, the 2000 Census reports that, within suburbs of metropolitan Chicago, only 13% of U.S. owner-occupied households residing in small homes (defined as homes with two bedrooms or less) had children enrolled in public schools. This is to be compared to 34% for households residing in homes with three or more bedrooms (hereafter referred to as “large homes”).5 This disparity suggests that much, if not all, of the problem associated with controlling for public school quality stems from the market for larger homes. Buyers of large homes, because they are more likely to have children, drive up the prices of homes in good school districts, thus complicating any estimates of property tax capitalization that cannot fully control for school quality. Conversely, smaller homes will not likely reflect school quality differentials, thus neutralizing the problem of school quality capitalization. For small homes, observing inter-jurisdictional variation in school district property taxes, while controlling for other taxes and public services, will offer unique insights into the nature and degree of property tax capitalization. For this stratum of the housing market, educational property taxes are essentially direct transfers to households with children in the public schools. These transfers represent a tax without a corresponding direct benefit.6 The fact that households buying these small homes are statutorily required to “contribute” to this redistribution program provides the motivation for our identification strategy. A hedonic equation for these small homes should be free of complications generated by the problems inherent in measuring education quality. The vast majority of small-home buyers do not directly benefit from the local schools because they do not have children enrolled in those schools. As indicated above, the inter-jurisdictional distribution of non-education public services will impact small home values. To the extent that these services are unobserved and correlated with school district taxes, estimates of property tax capitalization will be biased. To minimize this potential problem, the present study incorporates a border discontinuity design similar to that used by Black (1999) and Bayer et al., (2007, hereafter BFM). Here, household observations are limited to those falling within a quarter-mile of a public school district border that itself intersects a single municipality. Spatially localized unobservable characteristics are then controlled for by identifying a given home's localized neighborhood that, while falling completely within a municipality, straddles a public school district border (quarter mile on either side of the border and a half mile in length). Thus, the key comparisons made in the empirical equations presented below are between small houses subject to differing education property tax rates, but similar neighborhoods, non-education services, and non-education municipal taxes. Our empirical findings suggest that, for small homes, education property taxes are capitalized almost fully into home values, thus supporting the earlier findings of Palmon & Smith and others. In the discussion that follows, Section 2 outlines our empirical design and describes the data used while Section 3 discusses our results. Section 4 concludes and provides directions for future research.

This study suggests that focusing on education taxes and small homes provides a convincing approach for estimating the rate at which property taxes are capitalized into home values. As argued above, this rate seems to be close to 100%. The findings reported here are of particular interest because they avoid much of the potential for bias that has been present in earlier studies. In addition to our border discontinuity design, we limit our sample of homes to a stratum of the housing market whose values are not believed to reflect differentials in a commonly omitted and difficult-to-measure variable: the provision and quality of local public schools. This is because, for most households living in small homes, education property taxes represent a cost without an offsetting benefit. It is reasonable to ask why this straightforward approach has not been attempted before. Interestingly, the conditions for this quasi-experiment did not hold fifty years ago when the capitalization literature first began. The requirement for the estimations presented here is the imposition of a significant tax without a significant benefit. By the year 2000 small suburban homes were only rarely occupied by households with children attending local public schools. This is the key to our identification strategy. However, data from 1960 shows that households occupying small homes in that year were considerably more likely to include public school students than similar homes in 2000. As shown in Table 3, in 1960 almost 30% of small homes in suburban Illinois included public school children. In 2000, the corresponding figure was only 12%.21 The identification strategy used here would not have worked for 1960 because suburban households in small homes then often had children in public schools. Indeed, the 30% figure for small homes in 1960 is almost as large as the 2000 figure for large homes, 32%. Thus, small homes in 1960 must have been just about as caught up in the complexities of capitalizing schooling benefits as large homes in 2000. From this perspective, the identification opportunity used in this paper only appeared relatively recently. The data for large homes in Table 3 suggest the increasing difficulty of thinking about the impact of school quality and taxes on the value of these homes. In contrast to 1960, by 2000 the owner-occupiers of large suburban homes were a highly heterogeneous group, with only a minority actively using the public school system. While capitalization theory for small homes is fairly straightforward, these large homes present serious theoretical questions for today's housing market. Fischel's (2001) home voter hypothesis must seem weaker as the proportion of households without children in the public schools increases. Under that hypothesis, the median household in a suburban community places heavy weight on the quality of schools for two reasons. First, that household may include children attending local public schools. Second, the hypothesis also anticipates that when a household eventually sells its home, school quality will be capitalized into home value because potential buyers will also value schools. With the median voter well disposed toward school quality, there is strong support for education taxes. However, if less than a third of suburban households have students in local schools, the median voter in any given jurisdiction is not likely to have children enrolled in those schools. Moreover, when that median household sells, a large proportion of potential buyers will themselves not have public school children. In essence, what is currently the case for small homes is increasingly the case for all homes. Indeed, between 1960 and 2000, the percent of new movers in suburban Illinois with public school children declined from 24% to 14% for small homes and from 56% to 38% for large homes (Ruggles et al., 2010), suggesting both sub-markets are becoming less likely to place a large premium on public school quality.22 From this perspective, public school systems look less and less like traditional public goods and increasingly like redistribution programs (see Kurban et al., 2012). Resolving the multifaceted sorting issues raised by this observation is a research task well beyond the current paper. We make these observations only to underscore that in many ways small suburban homes are substantially less complex objects of study. The full property tax capitalization rate estimated here for small homes still leaves open the question of which households bear the burden of that taxation. If buyers of small homes are fully compensated for education property taxes, to whom are these taxes shifted? Our results do not provide a clear answer to this question. Possibly some of the burden may be shifted back onto former owners who purchased their homes in a period when the market for small homes involved more households with public school children. At an earlier date, small homes in high quality/high expenditure school districts might have even sold at a considerable premium. These homes might have represented relatively cheap entry points to valuable public services. Holding on to such real estate over an extended period, while facing a changing pattern of market demand, households may have realized substantial capital losses. Of course such losses would have been hard to isolate in markets characterized by considerable nominal and real appreciation. Sellers were most likely unaware of this change. Alternatively, for newer dwellings, developers of small homes (including condos) in high-tax school districts may have borne a considerable portion of the negative capitalization. Other things equal, these developers could sell their product only at a discount from the price obtained for similar units in nearby lower-tax districts. In the long-run we would expect developers of small homes to only build on the low-tax side of such boundaries. Looking forward, residents of small homes may become more hostile to efforts to improve the local public schools. Indeed, given the trend toward fewer and fewer households with public school children, we might expect to see a more general decline in support for schools from local residents. Much evidence already suggests these trends, especially among elderly households (Button, 1992, Poterba, 1997 and Harris et al., 2001). More generally, many of the issues raised here with respect to education taxes, appear in more modest fashion with respect to other local services. The broad trend in suburban finance toward user fees would seem to underscore this observation (Netzer et al., 2001 and Been, 2005). The increases in suburban heterogeneity, differences in tastes for public goods, and an increasing ability to tailor public services to individual user demands all seem to suggest a breakdown in the Tiebout picture of local public goods provision. All these observations point toward the need for rethinking our models of suburban public finance. Finally, we can only speculate on the appropriateness of extending our finding of full capitalization of property taxes on small homes to the larger population of owner-occupied suburban dwellings. We find the case for such an extension plausible. But, precisely because of the confusion surrounding the distribution of benefits achieved from diverse publicly-funded goods over increasingly diverse suburban populations, it will remain quite difficult to empirically validate this proposition in the foreseeable future.