The Housing Crisis and State and Local Government Tax Revenue: Five Channels

By Byron Lutz, Raven S. Molloy, Hui Shan. 2010

140 citations recorded by the source corpus.

State and local government tax revenues dropped steeply following the most severe housing market contraction since the Great Depression. We identify five main channels through which the housing market affects state and local tax revenues: property tax revenues, transfer tax revenues, sales tax revenues (including a direct effect through construction materials and an indirect effect through the link between housing wealth and consumption), and personal income tax revenues. We find that property tax revenues do not tend to decrease following house price declines. We conclude that the resilience of property tax receipts is due to significant lags between market values and assessed values of housing and the tendency of policy makers to offset declines in the tax base with higher tax rates. The other four channels have had a relatively modest effect on state tax revenues. We calculate that these channels jointly reduced tax revenues by $15 billion from 2005 to 2009, which is about 2 percent of total state own-source revenues in 2005. We conclude that the recent contraction in state and local tax revenues has been driven primarily by the general economic recession, rather than the housing market per-se.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/91eb2f96b0c1890ce9ff6e4de7602e86a484c58f

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Citations in the corpus

Trade Shocks and the Provision of Local Public Goods (2017, background): “For evidence on the relationship between housing prices and local government budgets, see Lutz et al. (2010), Chernick et al. (2011), Alm et al. (2014), and Cromwell and Ihlanfeldt (2015).”
Do School Spending Cuts Matter? Evidence from the Great Recession (2018, unknown): “are collected on assessed values which follow market value with a considerable lag (Lutz 2008), and (b) policy-makers often offset declines in assessed values with higher tax rates (McMillen 2011; Lutz et al. 2011).”
Taxing Immovable Property Revenue Potential and Implementation Challenges (2013, background): “63 A well-known case in the US was ‘proposition 13’, an amendment to the Constitution of California enacted in 1978, which capped both property value increases (at 2 percent per year) and the tax rate (at 1 percent), but ‘capping’ is now in force in most US states (Lutz et al., 2010).”
Rethinking local government reliance on the property tax (2011, methodology): “2 The assessment process is analyzed in detail by Diaz (1990), Quan and Quigley (1991), Wolverton and Gallimore (1999), and McAllister et al. (2003). 3 For empirical estimates of these wealth effects, see Attanasio et al.”