Who Benefits from Targeted Property Tax Relief?

If you want to lower the price of housing and still house lots of people there is really only one way: build more housing. Yet politicians and voters continually seek to repeal the laws of supply and demand. A case in point, many states reduce property tax rates for seniors, veterans or the disabled or combinations thereof. Great for seniors, veterans and the disabled, right? Wrong. If supply doesn’t increase, lowering property taxes simply increases the price of housing.

If the property tax relief is targeted to a very small group then demand won’t increase much and the benefits will accrue to the targeted group but seniors and veterans are both a significant fraction of the population and an even more significant fraction of homeowners. Thus, we might expect that a significant fraction of the tax relief will be capitalized into housing prices–that’s exactly what Moulton, Waller and Wentland find in a new paper:

While property tax relief measures are often intended to aid specific groups, basic supply and demand analysis predicts that an unintended consequence of this particular kind of tax relief is that, on the margin, it increases demand for homeownership among its expected beneficiaries. Accordingly, we examine two property tax relief measures in Virginia that applied to disabled veterans and the elderly, finding that these policy changes had an immediate effect on home prices after the
voters approved them on Election Day. Overall, we find that home prices rose by approximately 5 percent in response to the increase in demand for homeownership. Indeed, the tax relief policies provide a unique, quasi-experimental methodological
setting where the treatment is exogenously assigned to specific groups within this market. We find that the effect was as much as an 8.1 percent price appreciation for homes in areas with high concentrations of veterans, 7.3 percent in areas with
more seniors, and 7.4 percent for senior preferred homes in all areas. The effect was highest, 9.3 percent, in areas with high concentrations of seniors and veterans, which translates to about $18,900, or roughly full capitalization, for the average
home. Conversely, the tax relief measures had little if any effect on homes in areas with fewer potential beneficiaries….

A cynic might argue that the true intent of the policy is to raise housing prices but this gives politicians and voters too much credit. The intent is sincere, it’s the means that are false.


Another form of property tax relief is to cap a property owner's annual increases in assessments (and, consequently, taxes), which has the effect of limiting supply (because owners are discouraged from selling and moving to another jurisdiction where the owner will not enjoy the relief) and discouraging outsiders from moving into the jurisdiction (because they will face a much higher tax rate and taxes as compared to the owners who have been there a long time). Property taxes have become like air fares: nobody pays the same amount for the same product.

As I've posted before, thanks to Prop 13 in California, there was a 30X spread in my old neighborhood, that has since grown to 60X. That's right, same home value, one person paying 60 times (!) another.

Florida also has this general policy ("Save Our Homes") along with the targeted relief to the groups listed in the post (all of which I oppose), but it hasn't been quite as bad as the California outcome because the supply of homes also keeps growing. That and the underlying tax rates are generally much lower, so the actual tax savings for most people is in the hundreds of dollars instead of tens of thousands.

Florida's cap is portable (i.e., if the Florida homeowner owner buys another home in Florida, in general the owner may transfer the assessment for the home sold to the home purchased). Thus, someone who resides in Florida for a long time can have a very low assessment even as the owner purchased progressively more expensive homes, the effect of which is to punish newcomers to the state. There are other offsetting benefits to moving to Florida (no income tax, broad protections from claims of creditors (which is why our governor moved to Florida), right to work laws, etc.), but home buyers from out of state are often shocked when they receive their first property tax bill and it's many times higher than what the sellers paid.

The correct way to ask this is who is harmed by a targeted property tax relief? Taxes should be fair and not punitive or designed to fill some political or social agenda. A better suggestion is to apply property taxes universally and fairly. Every property owner should pay the tax and the tax should only be used to fund those services directly related to property (such as sewer, water, fire or police funding). Tax all property, no exceptions, no exemptions. Then property taxes would be lower for all and be fair.

One of the things not appreciated about California is how responsible Prop 13 was (along with the decline in interest rates) for the huge run-up in real-estate prices. Prop 13 limited property taxes to 1% of market value, so the tax on a million dollar house (even one just newly purchased) is limited to a relatively affordable $10,000.

I was living in California when Prop13 passed. If you weren't there and an adult owning property you have no idea how bad the situation had gotten. I remember taking a real estate class from a retired LA County assessor. He proudly told the class how he forced a little old lady out of her home in LA. She had a two bedroom bungalow worth about $150K (in the 70's). A developer had bought a few lots on the block next to her and built a four story office building worth a couple million. Thus, the genius assessor, theorized this little old lady's house was not valued at it's highest and best use so he assessed it at a million dollars. She of course couldn't afford the pre-prop13 taxes then so she sold and the house was bought by a real estate speculator and would someday be replaced by a high rise or something that would bring in more revenue to the county. That's it! The little Eichmann assessor did his job and it was all about more tax revenue to the insatiable LA government.

The run up in real estate prices in California is due to many things. Location being prime. Not just a oceanfront or mountain view location but the beautiful countryside that is California. The population there, now at almost 40 million is nearly double what it was when I left in 1980. That population is the second factor in real estate prices. Other factors are zoning and associated permit costs.

I could tell you that I wish I still owned my Home in Southern California but if I did in those 38 years since I sold I would have paid for the house five times over in property taxes.

"The run up in real estate prices in California is due to many things. Location being prime. Not just a oceanfront or mountain view location but the beautiful countryside that is California."

Yes, that's a common belief, but I don't agree. If the property tax rate in California was 2% per year instead of 1%, that would have limited price increases (in exactly the same way as higher mortgage rates would have).

"The population there, now at almost 40 million is nearly double what it was when I left in 1980."

The populations of warm-weather states like North Carolina, Florida, Georgia, and Arizona have doubled since 1980 too. They also have beautiful mountains, coastline, or both -- but their property prices have not exploded as in California.

I like your idea. So... Let me get this right. By your logic if we increased property taxes to, say... 5% the house prices might average below $100K !! In fact the state of California might make soooo much money on this they they would build houses and give them away just to have more property tax revenue.

I see where you are going on this. My god! Tyler should hire you or give you a scholarship or something. The state of California should put your statue outside the statehouse. You are a frigging economic genius and deserve the Nobel award in economics.

"I like your idea. So… Let me get this right. By your logic if we increased property taxes to, say… 5% the house prices might average below $100K !!"

Well, that's just about where the city of Detroit is right now -- property tax rates are 3.5% and the median home value is $44K. The problem, of course, is those tax rates (along with other costs and problems) hold down housing costs so far,that new construction and even major renovations are uneconomic -- houses will never be worth the dollars poured into them. To get around this problem, the city effectively buys new construction with huge 15-year 'enterprise zone' tax breaks.

So, yes, if the state of California jacked up taxes from 1% to 5% (and the property taxes on a $1M house from $10K to $50K a year), prices would drop dramatically. Do you really doubt that? To get to Detroit levels, though, you need to create a death spiral (raise tax rates, property values and revenues 'unexpectedly' decline, raise tax rates again, more declines -- rinse and repeat).

People seem to be missing the big picture. The important cap is not the 1% of assessed value, it's that the assessed value can't go up more than 2%/year (except on sale). Even if you believe in the theory of Prop 13 (I don't), that just seems way too low - the allowed increase will never get even close to fair value, no matter how long it applies. So the people in my old neighborhood whose assessed value (based on 1976 values) started in the $100K range, are never going to get even close to $6-7M. And we shouldn't worry to much about old ladies with $6M homes getting priced out. Worst case, they can do a reverse mortgage. But realistically, granny shouldn't be subsidized to stay by herself on a one acre lot in one of the best neighborhoods in Silicon Valley. (A separate issue is now she's even more locked in, given the step up in basis on death, but no estate tax b/c less than exclusion)

Kudos to Alex Tabarrok for at least addressing the property zoning and related issues.

In general, American libertarians and free marketeers are feckless weaklings.

Oh, free trade and the minimum wage---let us scale to the very pinnacles of righteous indignation, armed with megaphones.

Property zoning? Let's acknowledge property zoning is an issue, and change the topic. No calls to eliminate property zoning, or declarations that "zoning is theft."

And jeez, why is sidewalk vending, push-cart vending, or truck-vending universally criminalized in the US, without the slightest murmur from "libertarians"?

We believe in free markets, except when we don't.

Food trucks are hip and okay, No clothing trucks, or book trucks, or smartphone trucks etc. Those are the rules.


?? .... +1 to what exactly ?

Tabarrok merely repeats some simple, well known evils of the property tax (unfairness/adverse effects).

Genuine libertarians want property taxes abolished. Real estate taxes are effectively rental-payments to the landlords (local government politicians). Stop paying your property taxes and those real owners of your home will evict you and sell it.
Anything unjust about that situation ?

BTW many/most people with home mortgages are personally taxed on the full assessed valuation of their property, even though the mortgage-holder/lender actually "owns" th majority equity in their property. Does that sound fair and just ?

(P.S. i think there's some blood/DNA test for genuine libertarians)

I agree with Benjamin that many people claim to be libertarians, but do not have the courage of their convictions on many issues, zoning being a notable example. In your terms, I believe that there are very few "genuine libertarians", even relative to the already small number of self-identified libertarians.

Regarding property taxes in general, no, I don't think they are unjust. Given that taxes will be levied, property taxes seem like one of the best ways to do it.

Regarding mortgages, that is fair and just. If the mortgage lender was responsible for some share of the taxes, they would just pass that amount on to the owner in the form of higher interest rates. Given that the two situations have the same economic consequences, we may as well assign the taxes to the owner rather than the lender, as we do with every other form of investment.

I should note that I am not a libertarian, genuine or otherwise.

You must hang out with a different set of Libertarians.

In general, American libertarians and free marketeers are feckless weaklings.

Because there's not very many of us, yes. You might have noticed that we don't have free trade either. Libertarians and libertarian groups scream about zoning and sidewalk vending rules all the time, food and otherwise. The Institute for Justice has a number of lawsuits along those lines. Yes, many are food, but the ones in Hialeah, FL, Atlanta, GA, San Juan County, WA, and others are not.

There are plenty of calls to eliminate zoning, and endless praise for Houston's lack of zoning. (Even if, yes, Houston unfortunately has parking minimums outside downtown and other restrictions, it does lack zoning and is more deregulated than other American large cities, if not perfect.) The NC legislature passed a law eliminating the ability of cities to pass zoning rules based on aesthetics and other laws against housing for the poor.

I'm heartened by some of the recent moves by various neoliberals in the Democratic Party taking aim at zoning, but I'm afraid that they're not going to have enough pull with their movement to overcome the skepticism of many in their coalition for developers.

Here's Mercatus in favor of California's SB 827. (Of course, one of the dangers here is that any praise by libertarians will only rile up progressives against it, since it's thus obviously a Soros Koch conspiracy.)

My neighborhood has a mexican push cart guy now.

Cops don't do anything. I'm fairly certain he doesn't have any permits.

Same with the tamale lady.

Most of the libertarian-minded people I know are strong YIMBYs (yes in my back yard). We see that strict zoning laws are destroying this country by cutting people off from economically dynamic regions.

In almost all cases, seniors are not concerned about home prices going up. They are not planning to buy another home. They are planning to either die in the home they live in, or sell it and move (reluctantly) to a retirement community/nursing home.

They are, however, very worried that continued increases in property taxes will force them out of their homes. In many cases their home is now worth hundreds of thousands of dollars more than what they paid for it, but their income is a fraction of what it was when they were working.

At a recent meeting of one of my local taxing authorities, I found out these seniors (65+) have the option to defer their tax (albeit with 5% annual interest) until the property is sold, so that they are not forced out.

From these numbers, it would seem that such targeted property tax relief is quite effective in effecting a one-time wealth transfer to groups perceived as deserving. The effect is probably not too different from what would be achieved by cash payments to those groups. (Most people don't want to move, so cash payments to veterans would probably drive up property values in areas with large concentrations of veterans.) So these measures don't seem more offensive than veterans benefits or Social Security.

ISTM that the money flows to builders, or sellers, anyway.

. Accordingly, we examine two property tax relief measures in Virginia that applied to disabled veterans and the elderly, finding that these policy changes had an immediate effect on home prices after the voters approved them on Election Day

I knew they would be approved, but I voted against those measures with more fervor than anything else I voted on the last time I lived in Virginia. Terrible public policy, but frightfully popular.

Are there districts with a "progressive" property tax rates? I.e. Homeowners pay a higher rate on more valuable properties. This seems relatively simple and would address some of the issues.

florida has what they call a homestead exemption, that makes the tax progressive for home owners but regressive for renters, who tend to be lower income. It looks progressive if you don't think about it for more than a few minutes.

I'd say that property taxes are inherently progressive in the sense that owners of higher-priced homes pay much more while imposing less of a burden on local services. They may send their kids to private schools and are less likely to use public transit or libraries or, obviously, programs for low-income residents. For an extreme example, I think of some wealthy older relatives in a retirement community in Florida. The development is completely self-contained, with private roads and security and obviously none of the people living there are putting demands on the local schools. From a local government standpoint, they're pretty much pure cash cows with virtually no costs involved.

It will be interesting if this holds true in the long run and inflation-adjusted returns.

The general result is not surprising, but the full capitalization is.

The property tax relief is done in part to help seniors remain in place. So I would expect the new tax policy would make the market less liquid in the short run. Plus if the market was in a competitive equilibrium a widely available subsidy should affect the price, especially in the short run. Still, I wonder if the tax change had more impact on the demand or the supply side. I say that because did it increase the desire of seniors to relocate or did it decrease the desire (or necessity) for seniors to move. I think that matters little in the short run but more in the long run. If the current seniors living in the community decide to stay in place, then liquidity decreases and, it appears, you must compensate them for the full value of the subsidy to get them to move. However, in the long run, these homes will come back on the market and turnover of properties will return to long-term trends. Will the tax subsidy be enough to attract new seniors to the area and will they be willing to pay the full benefit of the tax reduction to the current owners. Will there be enough new entrants in a more liquid long-term equilibrium to keep the prices at the new higher level in real terms in the long run? Time will tell.

Wouldn't the price change embedded in the house benefit them when they mortgage or sell their house?

Not that this means it's the necessarily best way to facilitate access to decent housing for veterans or seniors, but .... what's the difference? The benefit accrues to the same group regardless.

The subsidy only goes to some class of people. So only people who are willing to buy and qualify should be willing to pay a higher price. Initially those who qualify and own a residence get a lowering of their monthly housing costs. To get them to surrender that benefit you need to compensate them. Overtime depending on how many new buyers qualify for the benefit I would expect the value of the subsidy to decline.

"The intent is sincere, it’s the means that are false."

Alex, that's a comma splice! Come on -- there are kids reading. Model good punctuation for them.

My friend ran for Boro Council in NJ last year. One of his big issues was property taxes. When he talked to older voters, they didn't care about the issue, since they took advantage of the "freeze" that NJ allows.

My friend didn't win.

In British Columbia, the provincial government has two property-tax deferral schemes: one for "seniors" (age 55+) and one for families with children (child <18 or in post-secondary).

Essentially, any homeowner who has a child after the age of 32-33 never has to pay property tax until the house is sold.

The provincial government loans you the deferred taxes at subsidized rates: 0.70% for seniors, 2.70% for families with children (2018). Those are much better rates than homeowners can get on HELOCs in BC.


BC also has one of the most unaffordable residential property markets in the world, relative to local incomes. Surprise!

Successive governments have tried different schemes to make housing "more affordable", but they keep pressing the gas and the brakes at the same time.

Indeed. Whatever regulatory and other favors are enacted in order to make houses affordable mostly increases house prices, and makes these less affordable. That is why it's more important to help our young to afford houses than to give them affordable houses.


Nathan touched on it, but no one else raised the point that preferential treatment for seniors is based on the premises that they are less able to pay due to living on fixed income (wrong) and fairness requires that those who no longer burden the public school system with kids as younger families do ought to get a break (right).

I think that as interest rates rise a more important factor affecting housing prices will be "interest rate lock"--the incentive folks who took out mortgages with ultra-low rates during the Obama years have to stay in place and reduce the supply of housing units available.

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