Property Values, Mello-Roos Tax and Efficient Local Public-Good Provision

Abstract

This paper tests the efficiency of local public good provision in Mello-Roos Community Facilities Districts (CFDs) in California by investigating the effects of the Mello-Roos tax, a non-ad valorem tax associated with CFDs to fund public goods, on property values. The Mello-Roos tax captures variations in public-good provision across communities that are beyond the baseline funded through traditional revenue sources, under California's substantial property tax limitations since Proposition 13. The paper demonstrates that underprovision in local public goods is implied by a positive Mello-Roos tax effect on property values for properties of all sizes. The results from estimating hedonic pricing models show that, for CFDs in Los Angeles, Riverside, San Bernardino and San Diego Counties, there is no evidence of underprovision of local public goods, and the result is not inconsistent with efficient public-good provision for counties except for Los Angeles. Cities with a greater revenue, greater expenditure, and lower density have more positive Mello-Roos tax effects on property values, which is consistent with high-demand, high-provision-cost areas being those where budgetary restrictions originating from Proposition 13 are more binding, limiting public-good provision.

Keywords: Mello-Roos Tax, Public-Good Provision, Property Values, Capitalization, Property Taxes, Special Taxing Districts

JEL Classification: H21, H40, H41, R38, R51, H71, H72