Small Homes, Public Schools, and Property Tax Capitalization

26 Pages Posted: 14 Mar 2013

See all articles by Ryan Gallagher

Ryan Gallagher

Northeastern Illinois University - Economics

Haydar Kurban

Howard University

Joseph Persky

University of Illinois at Chicago

Date Written: March 1, 2013


Efforts to estimate the degree to which local property taxes are capitalized into house values are complicated by any spurious correlation between property taxes and unobserved public services. One public service of particular interest is the provision of local public schools. Not only do public schools bulk large in the local property tax bill, but the inherent difficulty in measuring school quality has potentially undermined earlier attempts at achieving unbiased estimates of property tax capitalization. This particular problem has been of special concern since Oates’ (1969) seminal paper.

We sidestep the problem of omitted or misspecified measures of school quality by focusing on a segment of the housing market that likely places little-to-no value on school quality: small homes. Because few households residing in small homes have public school children, we anticipate that variations in their value does not account for differentials in public school quality. Using restricted-access microdata provided by the U.S. Census, and a quasi-experimental identification strategy, we estimate that local property taxes are nearly fully capitalized into the prices of small homes.

Suggested Citation

Gallagher, Ryan and Kurban, Haydar and Persky, Joseph, Small Homes, Public Schools, and Property Tax Capitalization (March 1, 2013). US Census Bureau Center for Economic Studies Paper No. CES-WP-13-04. Available at SSRN: or

Ryan Gallagher (Contact Author)

Northeastern Illinois University - Economics ( email )

5500 N. St. Louis
Chicago, IL 60625
United States

Joseph Persky

University of Illinois at Chicago ( email )

725 University Hall (UH)
Chicago, IL 60607-7121
United States

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