1. Empirical Tiebout © Allen C. Goodman, 2015 Read Tiebout Read Oates

2. What should we look for? We showed last time that if we have an asset (let’s say a bond), that pays $y per year, its value V is approximately: V = y/r; We wrote D = 1/r, so V = Dy. Suppose we now tax that bond at rate t. What will happen to its value?

3. Value of a taxed asset V = Dy – D(tV)Why? Then: V (1 + Dt) = Dy, and V = Dy/(1 + Dt) What does this mean? As t , V  Tiebout

4. Oates’s Thought If Tiebout was right, and people shopped around: –Higher property tax rates, without accompanying higher services are likely to  lower house values in the places with higher taxes. –If the tax rates  better services, then these better services will  higher values. –Kind of a classic article!

5. Data for 53 New Jersey suburbs 1960 Census data. Suburbs, because they are likely to be similar, as opposed to central cities like Newark and Jersey City.

6. New Jersey Suburbs Manhattan Suburbs

7. OLS2SLS Negative

8. How do we interpret? Equations say that an increase in local property tax rates from 2% to 3%  reduced market value of house of about $1,500. What would theory tell us? –If interest rate is 5% –If life of house is 40 years –If mean house value is $20,000 –We expect reduction of value of $2,260 So, 1500/2260 = 0.66, About 2/3 of the taxes are “capitalized into lower property values.

9. What about expenditures He uses expenditures as his measure of educational output (inherently problematic – why?). He determines that a 1% point increase in property tax on $20,000 house  200, and argues that about ½ goes to education. From regression, a $100 increase in expenditures drives up value of home by about $1,200.

10. So? Roughly speaking, the benefits from the taxation, offset the tax costs. One can argue, roughly, that what the tax increase pays for (regarding higher education), is a wash in terms of property value. Concludes: –“Consumers thus appear to some extent to ‘shop’ for public services. If one community can provide a given program of public services more ‘cheaply’ (that is with lower tax rates) than another, at least some individuals appear willing to pay more to live there.”

11. Plethora of Studies If you do a citation search, you will find that this article was like Helen of Troy, the face that launched 1000 ships. All kinds of follow-ups. –Was this really what Tiebout meant? –Was the econometrics right? –Did this work at the individual house level, as opposed to the community level?

12. Goodman – 1983 (Land Economics) Took the model that Hamilton developed (the one presented in the previous lecture). Look at an equation as developed previously. then,

13. Derived from above First term – If all communities are “homogeneous” that is B i = P i, there would be no tax capitalization. Why? Second term – Differences in tax bases can make migration attractive?

14. Equation to estimate  1 – Impact of random tax difference  2 – Impact of tax differences among areas.  3 – Impacts of differing tax bases. If λ= 1  linear If λ = 0  logarithmic

15. Results Random differences are capitalized at just about 100%. Combination of community tax rates and tax bases are capitalized at about 60%. Kind of similar to Oates’s findings. Sample was 1835 houses in the New Haven Connecticut metro Area from 1967-1969

16. Why not 100% We’ve only talked about housing demanders. What about suppliers. If the demanders are willing to pay 100% capitalization, suppliers may be able, for a while, to get excess profits by providing housing. This increased production will lower prices and “undo” some of the capitalization.

17. Arrière pensées Tiebout model has some “legs” for the suburbs. There was a 50 th anniversary conference regarding the original article recently, with a volume to come out. Problems –Doesn’t tell us much about central cities. –Assumes everything is paid for from within. –No outside grants, federal or state monies.