ABSTRACT
This research assesses the impact of income and property taxes on house prices using a decadal panel data set for 63 metropolitan areas from 1970 to 1990. We find that marginal income and property tax rates are fully capitalized into house prices and explain a significant proportion of the regional variation in house prices. Applying the results to proposed tax changes, we show that removal of the interest and property tax deduction will reduce the average house price by 14% and could result in house price declines of up to 30% in some locations.

The full capitalization suggests that the tax changes would have limited effects on the allocation of real capital among structure types. Further, the result implies that past changes in the tax advantages of owner- occupied have had little impact on home ownership and housing investment and that the tax advantage to owner-occupied housing has not generated large efficiency losses. These small effects contrast markedly with th existing literature.

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Dice@cob.ohio-state.edu