Commercial Property Tax Incidence: Evidence from Urban and Suburban Office Rental Markets

Abstract

Do commercial property owners internalize increases in tax payments or pass these increases onto the renters of commercial space? To address this question, I develop a nonlinear mixed effect multilevel model that exploits cross-sectional and longitudinal variation in a panel of office rent and tax rate data for 1,300 office buildings across 93 Eastern Massachusetts municipalities over a 27 year period. Findings for the full set of buildings indicate a full-pass-through of a dollar increase in the tax payment to the renter of space. However, incidence for less centrally located buildings (outside a 5km radius from the Boston central business district) ranges from $0.52 to $0.67 for a dollar increase in the tax payment; incidence for more central buildings (within 5km from the Boston central business district) ranges from $1.06 to $1.39. An incidence greater than one is in line with theoretical hypotheses regarding general tax incidence within imperfectly competitive markets. Further, these findings indicate that elasticity of demand for office space relative to elasticity of supply may be larger in more decentralized locations.

Keywords: Commercial Real Estate, Property Tax, Tax Incidence

JEL Classification: R30, C26