Real Estate Taxes and Home Value: Evidence from TCJA

50 Pages Posted: 1 Apr 2020 Last revised: 5 Nov 2020

See all articles by Wenli Li

Wenli Li

Federal Reserve Bank of Philadelphia

Edison G. Yu

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: November 5, 2020

Abstract

We examine the impact of changes in the federal tax treatment of owner-occupied housing stemming from the implementation of the Tax Cuts and Jobs Act (TCJA) in January 2018 on local housing markets. Using county-level house price information and IRS tax data, we find that, holding everything else the same, capping the federal tax deduction of state and local taxes at $10,000 has caused the growth rate of home value to decline by an annualized 0.9 percentage point, or 18 percent, in areas where real estate taxes as shares of taxable income exceeded the national median. The results are robust when controlling for other changes in the tax reform. The areas with a high real estate tax burden also suffered from reductions in market liquidity after the reform. Fewer houses were transacted either in absolute numbers or as shares of total listings and houses stayed on the market longer before being sold. Importantly, we find that the housing market slowdown was accompanied by declines in local construction employment growth as well as multi-family building permits. Furthermore, on net more people moved out of these areas after the reform. Finally, we show that the act has already had political consequences. In the 2018 midterm Senate elections, more voters voted for Democratic candidates in areas with high real estate tax burden than they did for Republican candidates.

Keywords: TCJA, Real EstateTax, Housing Market

JEL Classification: R0, R2, G1

Suggested Citation

Li, Wenli and Yu, Edison G., Real Estate Taxes and Home Value: Evidence from TCJA (November 5, 2020). Available at SSRN: https://ssrn.com/abstract=3548112 or http://dx.doi.org/10.2139/ssrn.3548112

Wenli Li

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Edison G. Yu (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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