The Housing Crisis and State and Local Government Tax Revenue: Five Channels

55 Pages Posted: 26 Jul 2011

See all articles by Byron F. Lutz

Byron F. Lutz

Federal Reserve Board - Research Division

Raven Molloy

Board of Governors of the Federal Reserve System

Hui Shan

Board of Governors of the Federal Reserve System

Date Written: July 26, 2011

Abstract

State and local government tax revenues dropped steeply following the most severe housing market contraction since the Great Depression. We identify five main channels through which the housing market affects state and local tax revenues: property tax revenues, transfer tax revenues, sales tax revenues (including a direct effect through construction materials and an indirect effect through the link between housing wealth and consumption), and personal income tax revenues. We find that property tax revenues do not tend to decrease following house price declines. We conclude that the resilience of property tax receipts is due to significant lags between market values and assessed values of housing and the tendency of policy makers to offset declines in the tax base with higher tax rates. The other four channels have had a relatively modest effect on state tax revenues. We calculate that these channels jointly reduced tax revenues by $15 billion from 2005 to 2009, which is about 2 percent of total state own-source revenues in 2005. We conclude that the recent contraction in state and local tax revenues has been driven primarily by the general economic recession, rather than the housing market per-se.

Keywords: property tax, sales tax, state income tax, transfer tax, housing market

Suggested Citation

Lutz, Byron F. and Molloy, Raven and Shan, Hui, The Housing Crisis and State and Local Government Tax Revenue: Five Channels (July 26, 2011). FEDS Working Paper No. 2010-49. Available at SSRN: https://ssrn.com/abstract=1895664

Byron F. Lutz (Contact Author)

Federal Reserve Board - Research Division ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Raven Molloy

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Hui Shan

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 452 3491 (Phone)
(202) 728 5887 (Fax)

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