Empirical Tiebout

© Allen C. Goodman, 2015

Read TieboutRead Oates

What should we look for?

We showed last time that if we have an asset (let’s say a bond), that pays $y per year, its value V is approximately:

V = y/r; We wrote D = 1/r, so V = Dy.

Suppose we now tax that bond at rate t.

What will happen to its value?

Value of a taxed asset

V = Dy – D(tV) Why?

Then:

V (1 + Dt) = Dy, and

V = Dy/(1 + Dt)

What does this mean?

As t, VTiebout

Oates’s Thought

• If Tiebout was right, and people shopped around:– Higher property tax rates, without

accompanying higher services are likely to lower house values in the places with higher taxes.

– If the tax rates better services, then these better services will higher values.

– Kind of a classic article!

Data for 53 New Jersey suburbs

• 1960 Census data.

• Suburbs, because they are likely to be similar, as opposed to central cities like Newark and Jersey City.

New Jersey Suburbs

ManhattanSuburbs

Oates Regressions

Dependent Variable: Median Home Value in 1,000 (1960)

Expected Sign (1) (2)

Constant ? -21.0 -29.02.4 2.3

% Tax Rate (log) Negative -3.6 -3.64.1 3.1

Expend/student (log) Positive 3.2 4.92.1 2.1

Miles to NYC (log) Negative -1.4 -1.34.8 4.0

Rooms Per House Positive 1.7 1.64.1 3.6

% Built Since 1950 Positive 0.1 0.13.9 3.9

Median Family Income Positive 1.5 1.58.9 7.7

% Incomes < 3000 Positive 0.3 0.33.6 3.1

R2 0.93 0.93

N 53 53

Coeffient in bold; t statistic in roman

OLS 2SLS

Negative

How do we interpret?

• Equations say that an increase in local property tax rates from 2% to 3% reduced market value of house of about $1,500.

• What would theory tell us?– If interest rate is 5%– If life of house is 40 years– If mean house value is $20,000– We expect reduction of value of $2,260

So, 1500/2260 = 0.66,About 2/3 of the taxes are

“capitalized into lower property values.

What about expenditures

• He uses expenditures as his measure of educational output (inherently problematic – why?).

• He determines that a 1% point increase in property tax on $20,000 house 200, and argues that about ½ goes to education.

• From regression, a $100 increase in expenditures drives up value of home by about $1,200.

So?

• Roughly speaking, the benefits from the taxation, offset the tax costs.

• One can argue, roughly, that what the tax increase pays for (regarding higher education), is a wash in terms of property value.

• Concludes:– “Consumers thus appear to some extent to ‘shop’ for

public services. If one community can provide a given program of public services more ‘cheaply’ (that is with lower tax rates) than another, at least some individuals appear willing to pay more to live there.”

Plethora of Studies

• If you do a citation search, you will find that this article was like Helen of Troy, the face that launched 1000 ships.

• All kinds of follow-ups. – Was this really what Tiebout

meant?– Was the econometrics right?– Did this work at the individual house

level, as opposed to the community level?

Goodman – 1983 (Land Economics)

• Took the model that Hamilton developed (the one presented in the previous lecture).

• Look at an equation as developed previously.

1i i

ii

Dy Dt BP

t D

then,

Derived from above

• First term – If all communities are “homogeneous” that is Bi = Pi, there would be no tax capitalization. Why?

( )

(1 ) (1 )i i i

i i ii i

B P D t DdP dt dB

t D t D

• Second term – Differences in tax bases can make migration attractive?

Equation to estimate

1 – Impact of random tax difference

0 1 2 3

1( )ni

j jn ni i i i

Pz t t t B

2 – Impact of tax differences among areas.

3 – Impacts of differing tax bases.

If λ= 1 linearIf λ = 0 logarithmic

Results

• Random differences are capitalized at just about 100%.

• Combination of community tax rates and tax bases are capitalized at about 60%. Kind of similar to Oates’s findings.

Sample was 1835 houses in theNew Haven Connecticut metro

Area from 1967-1969

Why not 100%

• We’ve only talked about housing demanders. What about suppliers.

• If the demanders are willing to pay 100% capitalization, suppliers may be able, for a while, to get excess profits by providing housing. This increased production will lower prices and “undo” some of the capitalization.

Arrière pensées

• Tiebout model has some “legs” for the suburbs. There was a 50th anniversary conference regarding the original article recently, with a volume to come out.

• Problems– Doesn’t tell us much about central cities.– Assumes everything is paid for from within.– No outside grants, federal or state monies.