You Can Take it With You: Proposition 13 Tax Benefits, Residential Mobility, and Willingness to Pay for Housing Amenities

32 Pages Posted: 2 Jul 2009

See all articles by Fernando V. Ferreira

Fernando V. Ferreira

University of Pennsylvania - The Wharton School

Date Written: June 1, 2008

Abstract

The endogeneity of prices has long been recognized as the main identification problem in the estimation of marginal willingness to pay (MWTP) for the characteristics of a given product. This issue is particularly important when estimating MWTP in the housing market, since a number of housing and neighborhood features are unobserved by the econometrician. This paper proposes the use of a well defined type of transaction costs - moving costs generated by property tax laws - to deal with this type of omitted variable bias. California's Proposition 13 property tax law is the source of variation in transaction costs used in the empirical analysis. Beyond its fiscal consequences, Proposition 13 created a lock-in effect on housing choice because of the implicit tax break enjoyed by homeowners living in the same house for a long time. First, I provide estimates of this lock-in effect using a natural experiment created by two subsequent amendments to Proposition 13 - Propositions 60 and 90. These amendments allow households headed by an individual over the age of 55 to transfer the implicit tax benefit to a new home. I show that mobility rates of 55-year old homeowners are approximately 25% higher than those of 54 year olds. Second, all these features of the tax law are then incorporated into a household sorting model. The key insight of this model is that because of the property tax law, different potential buyers have different user costs for the same house. The exogenous property tax component of this user cost then works as an instrument for prices. I find that MWTP estimates for housing characteristics are approximately 100% upward biased when the model does not account for the price endogeneity.

JEL Classification: R21, H31

Suggested Citation

Ferreira, Fernando V., You Can Take it With You: Proposition 13 Tax Benefits, Residential Mobility, and Willingness to Pay for Housing Amenities (June 1, 2008). US Census Bureau Center for Economic Studies Paper No. CES-WP- 08-15. Available at SSRN: https://ssrn.com/abstract=1427832 or http://dx.doi.org/10.2139/ssrn.1427832

Fernando V. Ferreira (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7181 (Phone)
215-573-2220 (Fax)

HOME PAGE: http://real.wharton.upenn.edu/~fferreir/

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