You Can Take it with You: Transferability of Proposition 13 Tax Benefits, Residential Mobility, and Willingness to Pay for Housing Amenities

UC Berkeley Center for Labor Economics Working Paper No. 72

54 Pages Posted: 5 Feb 2005

See all articles by Fernando V. Ferreira

Fernando V. Ferreira

University of Pennsylvania - The Wharton School

Date Written: June 2004

Abstract

In 1978, Californians approved Proposition 13, which fixed property tax rates at 1% of housing prices at the time of purchase. Beyond its fiscal consequences, Proposition 13 created a lock-in effect on housing choice because of the implicit tax break enjoyed by homeowners living in the same house for a long time. In this paper, I provide estimates of this lock-in effect, using a natural experiment created by two subsequent amendments to Proposition 13 - Propositions 60 and 90. These amendments allow households headed by an individual over the age of 55 to transfer the implicit tax benefit to a new home. I show that mobility rates of 55-year old homeowners are approximately 25% higher than those of 54-year olds. The second contribution of this paper is the incorporation of transaction costs, due to Proposition 13, into a household location decision model, providing a new way to estimate marginal willingness to pay (MWTP) for housing characteristics. The key insight of this model is that because of the property tax laws, different potential buyers have different user costs for the same house. The exogenous property tax component of this user cost then works as an instrument to solve the main identification problem of revealed preference models - the correlation between price and unobserved quality of the product.

Keywords: Household mobility, housing choice, Proposition 13

JEL Classification: R2, R21, H23, H41

Suggested Citation

Ferreira, Fernando V., You Can Take it with You: Transferability of Proposition 13 Tax Benefits, Residential Mobility, and Willingness to Pay for Housing Amenities (June 2004). UC Berkeley Center for Labor Economics Working Paper No. 72, Available at SSRN: https://ssrn.com/abstract=661421 or http://dx.doi.org/10.2139/ssrn.661421

Fernando V. Ferreira (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7181 (Phone)
215-573-2220 (Fax)

HOME PAGE: http://real.wharton.upenn.edu/~fferreir/

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