The Impact of Local Taxes and Public Services on Property Values

Sveriges Riksbank Working Paper Series No. 374, April 2019

54 Pages Posted: 6 Jan 2021

See all articles by Anna Grodecka-Messi

Anna Grodecka-Messi

Sveriges Riksbank

Isaiah Hull

Sveriges Riksbank - Research Division

Date Written: April 1, 2019

Abstract

Attempts to measure the capitalization of local taxes into property prices, starting with Oates (1969), have suffered from a lack of local public service controls. We revisit this vast literature with a novel dataset of 947 time-varying local characteristic and public service controls for all municipalities in Sweden over the 2010-2016 period. To make use of the high dimensional vector of controls, as well as time and geographic fixed effects, we employ a novel empirical approach that modifies the recently-introduced debiased machine learning estimator by coupling it with a deep-wide neural network. We find that existing estimates of tax capitalization in the literature, including quasi-experimental work, may understate the impact of taxes on house prices by as much as 50%. We also exploit the unique features of our dataset to test core assumptions of the Tiebout hypothesis and to estimate the impact of public services, education, and crime on house prices.

Keywords: Local Public Goods, Tax Capitalization, Tiebout Hypothesis, Machine Learning, Property Prices

JEL Classification: C45, C55, H31, H41, R3

Suggested Citation

Grodecka-Messi, Anna and Hull, Isaiah, The Impact of Local Taxes and Public Services on Property Values (April 1, 2019). Sveriges Riksbank Working Paper Series No. 374, April 2019, Available at SSRN: https://ssrn.com/abstract=3747255 or http://dx.doi.org/10.2139/ssrn.3747255

Anna Grodecka-Messi

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

Isaiah Hull (Contact Author)

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

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