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.


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