Property Taxation, Zoning, and Efficiency: A Dynamic Analysis

59 Pages Posted: 20 Jun 2011 Last revised: 6 Nov 2024

See all articles by Stephen Coate

Stephen Coate

Cornell University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 2011

Abstract

This paper revisits the classic argument that a system of local governments financing public service provision via property taxes will produce an efficient allocation of both housing and services if communities can implement zoning ordinances. The novel feature of the analysis is a dynamic model in which housing stocks and public policies are endogenously determined. In each period, citizens choose both the level of services for their communities and the zoning ordinances that govern future new construction. The main result of the paper is that there does not exist an equilibrium which has a steady state that is both efficient and satisfies a local stability property. The paper also develops examples in which equilibrium allocations converge to a steady state in which there is over-zoning and households are forced to over-consume housing. The findings of the paper challenge the well-known Benefit View of the property tax.

Suggested Citation

Coate, Stephen, Property Taxation, Zoning, and Efficiency: A Dynamic Analysis (June 2011). NBER Working Paper No. w17145, Available at SSRN: https://ssrn.com/abstract=1866104

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