Property Taxation and the Demand for Homeownership

Abstract

The purpose of this article is to analyze the impact of an increase in the effective Abstract rate of property taxation on the probability of homeownership by individuals at different income levels residing within central city and suburban housing markets. A theoretical model is provided that indicates that an increase in the tax rate produces two opposing effects on the demand for homeownership: (1) due to the property tax deduction, the price of ownership declines relative to renting, and (2) the overall price of housing rises relative to the cost of non housing goods. The strengths of these effects are investigated by conducting a logit analysis of the probability of homeownership with data from the Panel Study of Income Dynamics. Results show that a tax rate increase reduces the probability of homeownership, especially for middle-income households.

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