Propertytaxdelinquencies’effectsonrevenuevolatilityinAmericancities:

ExaminingtheoutcomesoftheGreatRecession.

OlhaKrupa,Ph.D.AssistantProfessorInstituteofPublicServiceSeattleUniversity90112thAve,P.O.Box222000,SeattleWA98122Email:krupao@seattleu.eduPhone:206-296-2509

KennethA.KrizRegentsDistinguishedProfessorofPublicFinanceDirector,KansasPublicFinanceCenterWichitaStateUniversity1845FairmountStreetWichita,KS67260-0155Email:ken.kriz@wichita.eduPhone:316.978.6959

Abstract

Thisstudypresentsastylizedinteractivemodelofhomeprices,propertytaxcollectionratesandsocioeconomicindicatorsintheUScitiesbeforeandduringtheGreatRecession.Usingapanelofthe147largestAmericancitiesin2003-2012,thisresearchexploreshowdifferencesinincomes,populationgrowth,homepricedynamics,andelementsofthelocalpropertytaxsystemsaffectthelocalgovernmentfinancesinrecessionperiods.Correctingforendogeneityintheseinteractionsbyusingseeminglyunrelatedregressionsandathreestageleastsquaresmethod,thestudyfindsthateconomicdownturnsresultintwoeffects:thefirsteffectisthattherecessionhasanegativeeffectonhousingprices,whichistranslatedintolowerassessedvaluations.Thesecondeffectcompoundsthenegativefiscalimpactbyreducingpropertytaxcollectionratesandincreasingdelinquencies.However,wefindnoevidenceofa“takeback”reactionfromjurisdictionsinsettingmillagerates.Thefirsttwoeffectscaninducemuchlargerfiscalimpactsonlocalgovernmentsduringrecessions.

KeyWords:revenuevolatility,propertytax,assessedvalues,collectionrates,delinquency,GreatRecession.

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Introduction

Propertytaxincomeprovidesthemostsignificantfundingsourceforlocalgovernmentsin

theUnitedStates.Thatincomeiscrucialforessentialpublicservicesincludingpoliceand

firedepartments,andnumeroussocialprograms.Becausecitiesarelimitedintheirdebt

issuancecapacity,thestabilityofincomefrompropertytaxesisnecessaryforcitiesto

provideeffectivemunicipalservices.Numerousfactors,includinghousingprices,

foreclosurerates,unemployment,incomegrowth,anddelinquencyratesinpropertytax

collectioninfluencetheextenttowhichthatincomevaries.Shortfallsinpropertytax

revenueundercutacity’sabilitytofundtheseessentialpublicservices.

DuringtheGreatRecession,atboththefederalandstatelevels,taxesonincomeandon

consumptionofgoodsandserviceswerethehardest-hitsourcesofgovernmentrevenue.At

thelocallevel,propertytaxrevenuesdidnotdeclineasmuch:therefore,atleastpartially

compensatingforlossesinotherrevenuecategories(Ihlanfeldt2011,Almetal2011,

MikesellandCheoul2013,MikesellandMullins2013).Earlystudiesoftherecessionagree

thathigherpropertytaxassessmentsandgrowingtaxburdensprovidedforanoutstanding

resilienceinthepropertytaxcollectionsduringthemostrecenteconomicdownturn.The

authorsofthosestudies,however,recommendextensivefollowupontheirfindings

assumingthatduetoasignificanttimelagbetweenpropertytaxassessmentsandactual

collectionsthisdocumentedrobustpropertytaxperformancewillweakeninthecoming

years.

AmongearlierstudiesoftaxincomeduringtheGreatRecession,thereremainsagapin

understandinghowinthemidstofthehousingcrisispropertytaxescontributedtolocal

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revenues,andwhethertheearlierstudiesfeaturedadataperiodtooshorttofullycapture

whathappenedwithpropertytaxationduringtherecession.Similarly,scholarsdonotyet

understandhowthespecificinteractionsofthemarketandtheadministrativefeaturesofa

municipalityaffectpropertytaxrevenues.Inanefforttounderstandthosefactorson

revenuevolatility,thisresearchproposestoanswerthefollowingquestions:

1) Howdodecliningpropertytaxescollectionrates,housevalues,andincomesin

combinationwithemploymentpatternsofcityresidentsinteractinthelargesturban

areasoftheUnitedStates?

2) Whatfactorsmakesomecitiesconsistentlymoresuccessfulinsecuringtheirnecessary

taxrevenuethanothers,andhowdoregionalandlocalvariationscontributetothese

differences?

3) Inanticipationofthenexteconomicdownturn,whichpolicyrecommendationscould

mosteffectivelyaddressandimprovepropertytaxadministration?

Thisresearchdocumentspropertytaxcollectiontrendsoveradecadeof2003-2012across

thelargestAmericancities,notinganyregionalvariation,explainstheinteractioneffects

betweenpropertytaxcollectionrates,housevalues,income,andemploymentpatternsof

cityresidentsleadingtoshort-termvolatilityoflocalgovernmentrevenues,andprovides

policyrecommendationstocityplannersandbudgetanalystsonhowtheseinstitutional

factorsmayaffecttheirabilitytofundpublicservicesduringrecessions.Figure1motivates

thestudybyillustratingtherelationshipbetweenthechanginghomepricesandthe

relativegrowthinthesignificanceofthepropertytaxintotalrevenuesofthelargestUS

citiesbeforeandduringtheGreatRecession.

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Figure1.Homepricedynamicsandthegrowthofpropertytaxrevenueshareintotalrevenuesinthe147largestUSCities(2003-2012).

Thisstudyexplorestheserelationshipswithadatapanelforthe147largestUScitiesin

2003-2013.WeemploySeeminglyUnrelatedRegressionsandThree-stageLeastSquares

methodstocorrectforendogeneityamongvariables.Theresultsbroadlysupportthe

modelwhereeconomicdownturnshavetwoeffects:thefirsteffectisthattheeconomic

downturnnegativelyaffectshousingprices,whichistranslatedintolowerassessed

valuations,andthesecondeffectreducespropertytaxcollectionratesthereby

compoundingthenegativefiscalimpact.Therefore,inareaswithsubstantialeconomicand

housingmarketdownturns,notonlyisthepropertytaxlevyfalling,thecollectionofthe

levyisfallingaswell.Thiscaninducemuchlargerfiscalimpactsonajurisdiction.Ona

positivenote,thestudyfindsnoevidenceofa“takeback”reactionfromjurisdictionsin

settingtaxrates.Raisingtaxratesduringaneconomicdownturncouldcreateevenmore

problematiceconomicconditions.

0

0.05

0.1

0.15

0.2

0.25

-0.200

-0.100

0.000

0.100

0.200

0.300

0.400

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

PT/totalrevenues Houseprices

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Inwhatfollows,thenextsectiondescribestheliteratureontheinteractionsbetween

propertytaxcollections,assessedvalues,andbasicsocioeconomicindicatorsinAmerican

citiesandcountiesbeforeandduringtheGreatRecession.SectionIIIoutlinesthestudy

methodsanddata.SectionVdescribesthefindingsgainedfromthestudy,whilesectionVII

concludesthestudywiththediscussionofresults.

AReviewoftheLiterature:RevenueVolatilityandMunicipalFiscalHealth

“Indeed,localgovernmentrelianceonthepropertytaxratherthanonmoreelasticrevenuesourceslikeincome,sales,andexcisetaxeshas—sofar,inanyevent—helpedlocalgovernmentstoavoidsomeofthemoreseveredifficultiesexperiencedbymanyothergovernmentsinthe“GreatRecession”thatlastedofficiallyfromDecember2007toJune2009”.JamesAlm,2013.

StudiesoftheGreatRecessionacknowledgethepivotalroleofthepropertytaxin

stabilizinglocalrevenuestreams.Scholarsdocumenttheunexpectedresilienceinproperty

taxrevenuesduringtherecessionyears:notonlypropertytaxrevenuesdidnot

significantlydeclineduringtheGreatRecession,butalsotosomeextenttheyhave

compensatedthelocalgovernmentsforthelossofsales’andincometaxrevenues.Because

ofaconsiderabletimelagbetweenthehousepricemovementsandtheassessedvalue

adjustments,theunpopular,inelastic,and“inconvenient”propertytaxhasbecomethebest

revenuesourceduringtheGreatRecession(MikesellandMullins,2010;Ihlanfeldt,2011;

Almetal.,2011;Alm,2013;MikesellandLiu,2013;Rossetal,2015).Inwhatfollows,we

reviewthestudiesofthestateandlocalgovernmentresponsestotheGreatRecessionin

theUnitedStates.

Insurveyingstateandlocaltaxrevenuetrendsin1989-2009,MikesellandMullins(2010)

documentsignificantdeclinesinstateandlocalincomeandsalestaxesduringtheyearsof

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theGreatRecession.Duringthoseyearsthestatepersonalincometaxrevenuescontracted

by10.3percent,accompaniedbythe4.6and2.6percentdeclinesinsalestaxrevenuesat

thestateandlocallevels.Asignificantincreaseinpropertytaxcollections(6.3percent)

stabilizedothermorevolatilelocalrevenuestreams.Propertytaxcollectionshavebeen

“theonlybrightspot”instateandlocalfinancesduringrecessionyearsattributingtothe

modestoverallincreaseinlocalrevenuesandsuperiorfinancialperformanceoflocal

governmentsascomparedtostates.Thesecontemporaneousfindings,however,oughtto

beinterpretedwithcautionduetotimelagsextendingrecessioneffectswellbeyondthe

yearsoftheGreatRecession.

Lutz(2008)examinesaneffectbetweenhousepricesandpropertytaxcollectionsand

estimatesa3-yeartimelagbetweenthosebasedona1985-2005Census.Inhisstudythe

elasticityoflocalrevenuestohousepriceincreasesis0.4.Lutzconjecturesthatthe

remaining0.6ofthepriceeffectisabsorbedbymillageratereductionsandotherpolicy

changes.

AfollowupstudybyLutz,Byron,MolloyandShan(2010)explorestheeffectofhouseprice

declinesonstatetaxrevenuesbasedonsimilardata(1975-2007).Theseauthorsdocument

variedstateresponsestofiscalcrisisandstudylagsbetweenthehousingcrisisoutbreak

andstaterevenuedeclines.AttributingmostoftherevenuedeclinetotheRecession,the

authors’estimatesoftheeffectofthehousingmarketcollapseontotalstaterevenuesareat

fifteenbilliondollars,ortwopercentofthetotalstaterevenues.

AnticipatingRecession,Chernick,LangleyandReschovsky(2011)estimatetheeffectofthe

housingmarketcontractiononcentralcityspendingatsevenpercentonaverage,whilethe

7

thatthehardest-hitinnercitiesmayexperienceevenmoresignificantspendingcuts.This

studyhasbeendonebasedonasampleofsyntheticallyconstructedcitiesin1997-2008.

BoydandDadayan(2009;2010),CenteronBudgetandPolicyPriorities(2010)and

MikesellandLiu(2013)noteconsiderableheterogeneityinstateandlocalgovernment

responsestotheGreatRecession.Thisregionalvariationisattributedtotheirdiverse

economicnature,thediversityofthestatepropertytaxsystems,differencesinhousing

marketdynamics,andinsocioeconomicindicators.Forexample,studiesindicatethat

statesthathadbeensignificantlyaffectedbytheGreatRecessionmorepromptlyresorted

tospendingcuts(BoydandDadayan,2010).

MikesellandLiu(2013)connecttaxassessments,taxrevenues,andcollectionratesinto

onefiscalsysteminordertostudyfinancialconsequencesoftheGreatRecessiononone

hundredlargestUScitiesover1999-2011.Onacitylevel,theynote,propertytaxstability

dependsonpropertytaxbaseandpropertytaxrevenuedynamics.Theyfindthatthe

housingcrisisdidnotimmediatelyresultinreducedtaxcollectionsduetoaconsiderable

timelag.Expectingfuturerevenueinterruptionsoftheotherwisestablepropertytax

collections,thisstudyshowsdecreasesincollectionratesinselectcities.Althoughthe

studyfindsnoevidenceofsuchinterruptionsinrevenuecollectionsjustyet,these

delinquencyrateincreasesmaybeasignofconcern.

InastudyofcitiesandcountiesIhlanfeldt(2011)estimatesshort-runfirst-yearrevenue

elasticitiestopropertytaxratechangesbasedona1995-2009Floridasample.These

elasticitiesforcitiesandcountiesrangebetween(0.097)-(0.212).Ihlanfeldtconjectures

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thatmillagerateincreasesfullyoffsetrevenueshortfallsinFloridacounties,whilecities

stabilizetheirpropertytaxrevenuesbothwithrateincreasesandspendingcuts.

Exploringinteractionsbetweentheeffectsofthehousingcrisisandpropertytaxrevenues

basedona1994-2008Floridasample,DoernerandIhlanfeldt(2010)establishthe

relationshipbetweenper-capitarevenuesandhomevaluesthroughseveralchannels

includingassessedvalues,millagerates,taxbaseexpansionfromnewconstruction,and

non-taxrevenuesources.Asignificanteffectonpropertytaxrevenuescomesfromthetax

base,theynote,whilethereisnorelationshipbetweenhomepricesandpropertytax

revenues.Thispapersuggeststhatassessorsbetterreacttohomepriceincreasesthan

decreases.However,ifhomepricedecreaseswerelong-termandsubstantial,theassessors

wouldeventuallyhavetorespondbyloweringassessedvaluations.

Infollow-upstudy,IhlanfeldtandWillardsen(2014)examineasampleofFloridacitiesand

countiesorganizedintosixgroups:thelarge,mid-sizeandsmallcohortsofcitiesand

countiesovertheperiodof1995-2011.Thatstudyfindsthatcitiesmoreeffectivelyaddress

revenueshortfallscomparedtocounties,andtheydothatviamillagerateincreasesand

programcuts.OfallexaminedFloridacities,thelargestoneswereabletomorefullyoffset

millageratescomparedtomid-sizeandsmallcities.

Alm,BuschmanandSjoquist(2014)findthatchangesinpercapitaincome,population,and

employmentlevelssignificantlyaffectchangesinthetaxbase,whileincreasesin

foreclosuresnegativelyaffectingpropertytaxrevenuesthroughreductionsintaxlevy.

Theyillustratethenegativeimpactof“new”foreclosuresonpropertytaxlevies,taxbases,

andpropertytaxrevenuesinGeorgiabetween2006and2011.

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CromwellandIhlanfeldt(2015)studytheeffectsoftheGreatRecessionthroughthelensof

governmentcompetitionliterature.Thehypothesisoftheirstudyisthatlocalgovernment

responsesdependonthedegreeoflocalgovernmentmonopolyinlocaljurisdictions.Their

elasticityofmillageratestopropertytaxbaseare(0.27)and(0.34),andto

intergovernmentaltransfers-(0.004)and0.002forFloridacitiesandcounties.Again,the

citymillagerateincreasesandprogramexpenditurecutsweremoderatelyelasticwith

respecttorevenueshortfalls,whileintergovernmentaltransfercutswerehighlyinelastic

duringtheGreatRecession.

Ross,YanandJohnson(2015)examinefinancialsofthethirtyfivelargestUScitiesinthe

wakeoftheGreatRecession.Theyfindthatthesecitiesfaredsurprisinglywellprimarily

becauseofthestablerevenuesfrompropertytaxes.Asintergovernmentalgrantsand

transferflowsdriedoutduringrecessionyears,citiesresortedtodepletingtheirnetassets

andborrowingmore.DuringtheGreatRecession,thesecitiesincreasinglyreliedon

propertytaxesandevenmoreondeficitfinancing,previouslyanunconventionalfinancing

vehicleforthemunicipalgovernments.Thestudymentionsthatcitiesreturntofinancial

stabilityofpre-recessionlevelsbyabout2011.

TheModel

Theresearchmodelconjecturesthatdeclinesinlocaleconomicconditions,housingprices,

andpropertytaxcollectionratescollectivelyattributetorevenuevolatilityandshort-term

budgetshortfallsforlocalgovernments.Thiseconomicandfiscaleffectisfurther

exacerbatedbyweakeconomyinrecessionperiods.Figure2providesastylized

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relationshipmodelbetweenhousingmarketandeconomicconditions,propertytax

administrationvariables,andlocalgovernmentrevenuesfrompropertytaxes.

Figure2.Elementsofthepropertytaxsystemandpropertytaxrevenues:thechannelsofinfluence.

Theserelationshipscanbeexpressedviathefollowingsystemofequations:

∆𝐻𝑜𝑢𝑠𝑒𝑝𝑟𝑖𝑐𝑒!" = 𝛼 + 𝛽!∆𝐼𝑛𝑐𝑜𝑚𝑒𝑃𝑒𝑟𝐶𝑎𝑝𝑖𝑡𝑎!" + 𝛽!∆𝑈𝑛𝑒𝑚𝑝𝑙!" + 𝜀!∆log (𝐴𝑉)!" = 𝛾 + 𝛽!∆𝐻𝑜𝑢𝑠𝑒𝑝𝑟𝑖𝑐𝑒!" + 𝛽!𝑅𝑎𝑡𝑖𝑜!" + 𝜀!

∆𝑇𝑎𝑥𝑅𝑎𝑡𝑒!" = 𝛿 + 𝛽!∆log (𝐴𝑉)!" + 𝛽!∆𝐼𝑛𝑐𝑜𝑚𝑒𝑃𝑒𝑟𝐶𝑎𝑝𝑖𝑡𝑎!" + 𝛽!∆𝑈𝑛𝑒𝑚𝑝𝑙!" + 𝜀!∆𝐹𝑖𝑟𝑠𝑡𝑌𝑒𝑎𝑟𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛𝑠!" = 𝜁 + 𝛽!∆𝐼𝑛𝑐𝑜𝑚𝑒𝑃𝑒𝑟𝐶𝑎𝑝𝑖𝑡𝑎!" + 𝛽!∆𝑈𝑛𝑒𝑚𝑝𝑙!" + 𝜀!

(1)

where∆𝐻𝑜𝑢𝑠𝑒𝑝𝑟𝑖𝑐𝑒!"isthefirstdifferenceinaveragehomepricechange;

∆𝐼𝑛𝑐𝑜𝑚𝑒𝑃𝑒𝑟𝐶𝑎𝑝𝑖𝑡𝑎!"isthefirstdifferenceinpercapitaincome;∆𝑈𝑛𝑒𝑚𝑝𝑙!"isthefirst

differencetherateofunemployment;∆log (𝐴𝑉)!"isthefirstdifferenceinnatural

logarithmsoftotalassessedvalues;𝑅𝑎𝑡𝑖𝑜!"istheassessmentratio,orthelevelof

assessmentineachjurisdiction;∆𝑇𝑎𝑥𝑅𝑎𝑡𝑒!"isthefirstdifferenceintotalpropertytaxrates

House Prices

Socioeconomic Conditions

Property Tax Revenues

Assessed Values

Tax Rates

Rate Limitations

Assessment Levels

Collection Levels

11

ofanassessingjurisdiction,∆𝐹𝑖𝑟𝑠𝑡𝑌𝑒𝑎𝑟𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛𝑠!"isthefirstdifferenceinfirst-year

collectionratesofanassessingjurisdiction.α,γ,δ,andζaretheconstantterms.ε1,ε2,ε3,

andε4aretheerrortermsintheequations.Subscriptsi,tidentifycityandyearforeach

observation.

DataandMethodology

Inordertotestthehypotheseslaidoutabove,weobtaineddatafrom147largestUScities

(populationover150,000)overaten-yearperiodfrom2003-2012.Thecitieswere

geographicallydistributedthroughouttheUnitedStates,asshowninTable1.Westernand

Southeasterncitieshavesomewhatgreaterrepresentationinthesamplecomparedto

NortheasternandSouthwesterncities.

Table1.GeographicDistributionofSampleCities.

Region NumberofCitiesinSampleMidwest 27Northeast 12Southeast 37Southwest 22West 49TotalSample 147

Figure2illustratestheregionaldifferencesinhomepricedynamicsandgrowthratesin

propertytaxrevenuesasapercentageoftotalrevenuesbasedonthesedata.

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Figure2.Regionaldifferencesinhousepricedynamicsandpropertytaxrevenuegrowthrates(2003=100%)

0.6

0.8

1

1.2

1.4

1.6

1.8

2003200420052006200720082009201020112012

Southwest

0.6

0.8

1

1.2

1.4

1.6

1.8

20032004 2005 2006 2007 2008 2009 2010 2011 2012

Midwest

0.6

0.8

1

1.2

1.4

1.6

1.8

2003200420052006200720082009201020112012

Northeast

0.6

0.8

1

1.2

1.4

1.6

1.8

20032004 2005 2006 2007 2008 2009 2010 2011 2012

West

0.6

0.8

1

1.2

1.4

1.6

1.8

20032004 2005 2006 2007 2008 2009 2010 2011 2012

NewYorkCity

Propertytaxrevenues Houseprices

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Table3showsthevariablesinourdatasetaswellasthesourcesofthedata.

Table3.Variables,Definitions,andSourcesofData.

VariableName Definition SourcePTRevenue PropertyTaxRevenue($

millions)ComprehensiveAnnualFinancialReports

TotalRevenue TotalRevenue($millions) ComprehensiveAnnualFinancialReports

IncomePerCapita PerCapitaIncome USBureauoftheCensusUnempl UnemploymentRate USBureauofLaborStatisticsPopulation CityPopulation USBureauoftheCensusAV AssessedValuation($

millions)ComprehensiveAnnualFinancialReports

Ratio AverageAssessmentRatio PTLevy PropertyTaxLevy($millions) ComprehensiveAnnualFinancial

ReportsFirstYearCollections CollectionsofPropertyTaxes

dueinCurrentYearComprehensiveAnnualFinancialReports

TotalCollections CollectionsofPropertyTaxesdueinCurrentandPriorYears

ComprehensiveAnnualFinancialReports

TaxRate MillageRate($/$1,000inAssessedValue)

ComprehensiveAnnualFinancialReports

CPI ConsumerPriceIndex–AllUrbanConsumers

USBureauofLaborStatistics

Houseprice FHFAHomePriceIndex($thousands)

USFederalHousingFinanceAgency

Thesummarystatisticsforthedata(Table4)showmarkeddeviationfromnormalityfor

therevenueandlevyvariables.Asthesevariablesarelowerboundedbyzero,weestimate

ourmodelsusingthenaturallogofthevalues.Theeconomicvariableshaveapproximately

normaldistributions.Populationissimilarlyskewed,fromthesummarystatisticsitisclear

thatthesamplemainlyconsistsofmid-to-largesizedcities.

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Table4.DescriptiveStatisticsfortheSample.

Variable Mean Std.Dev. Minimum MaximumPTRevenue 472.01 2,030.73 2.66 19,513.45TotalRevenue 1,394.98 6,806.83 33,584.00 67,005.64IncomePerCapita 33,302.08 10,236.71 9,762.00 79,967.00Unempl 6.99 3.07 2.00 24.80Population 455,866.50 784,067.40 152,374.00 8,175,133.00AV 26,861.90 44,735.28 12.87 411,135.20Ratio 76.52 32.69 10.48 100.07PTLevy 341.12 1,501.96 2.40 19,284.50FirstYearCollections 95.95 4.65 55.15 128.15TotalCollections 98.32 3.60 60.06 128.30TaxRate 5.20 9.75 0.06 65.48CPI 1.13 0.08 1.00 1.25Houseprice 202.92 48.02 100.08 416.61

Figure3showsoneadditionalproblemforestimatingourmodel.Themeanofthefinancial

variables(inthiscaseassessedvaluation)isnotstationaryovertime.Theproblemisthat

thereislikelytobeserialcorrelationinobservations.Therefore,weestimateamodelin

firstdifferences,relatingthechangeinthefinancialvariablestochangesinthepredictor

variables.Thismodelformulationshouldalsoaccountforpotentialunobserved

heterogeneitysincethepropertiesoftheestimatorresemblea“meandifference”fixed-

effectsestimator.

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Figure3.MeanofAssessedValuation.

Afinalissueconcernsendogeneity.Previouspapers(e.g.,MikesellandLiu,2013)donot

accountforendogeneityinthetaxratesettingprocess.Legislativebodiesmayactto“take

back”somegainsinassessedvaluesbyadjustingtaxratestoachievepolicyand/orpolitical

goals.Also,aswesetforthinourtheoreticalmodel,somecommonexogenousvariables

exhibiteffectsnotjustonasinglevariable,butonthesystemasawhole.Therefore,we

employbothSeeminglyUnrelatedEquationsandthree-stageleastsquares(3SLS)

estimatorstoaccountforthisendogeneity,specifyingthefollowingsystem:

∆𝐻𝑜𝑢𝑠𝑒𝑝𝑟𝑖𝑐𝑒!" = 𝛼 + 𝛽!∆𝐼𝑛𝑐𝑜𝑚𝑒𝑃𝑒𝑟𝐶𝑎𝑝𝑖𝑡𝑎!" + 𝛽!∆𝑈𝑛𝑒𝑚𝑝𝑙!" + 𝜀!∆log (𝐴𝑉)!" = 𝛾 + 𝛽!∆𝐻𝑜𝑢𝑠𝑒𝑝𝑟𝑖𝑐𝑒!" + 𝛽!𝑅𝑎𝑡𝑖𝑜!" + 𝜀!

∆𝑇𝑎𝑥𝑅𝑎𝑡𝑒!" = 𝛿 + 𝛽!∆log (𝐴𝑉)!" + 𝛽!∆𝐼𝑛𝑐𝑜𝑚𝑒𝑃𝑒𝑟𝐶𝑎𝑝𝑖𝑡𝑎!" + 𝛽!∆𝑈𝑛𝑒𝑚𝑝𝑙!" + 𝜀!∆𝐹𝑖𝑟𝑠𝑡𝑌𝑒𝑎𝑟𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛𝑠!" = 𝜁 + 𝛽!∆𝐼𝑛𝑐𝑜𝑚𝑒𝑃𝑒𝑟𝐶𝑎𝑝𝑖𝑡𝑎!" + 𝛽!∆𝑈𝑛𝑒𝑚𝑝𝑙!" + 𝜀!

(1)

Results

Theresultsforthethree-stageleastsquaresestimationofequation(1)areshowninTable

5.Theseresultsbroadlysupportthemodelwhereeconomicdownturnshavetwoeffects.

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Thefirsteffectisthatthedownturnintheeconomyhasanegativeeffectonhousingprices,

whichistranslatedintolowerassessedvaluations.Thesecondeffectcompoundsthe

negativefiscalimpact.Aneconomicdownturnalsoreducespropertytaxcollectionrates.

Therefore,inareaswithsubstantialdownturns,notonlyisthepropertytaxlevyfalling,the

collectionofthelevyisfalling.Thiscaninducemuchlargerfiscalimpactsonajurisdiction.

Wefurtherfindnoevidenceofa“takeback”reactionfromjurisdictionsinsettingtaxrates.

Inthecontextofourinquiry,thisshouldbeseenaspositive.Raisingtaxratesduringan

economicdownturncouldcreateevenmoreproblematiceconomicconditions.Onecaveat

withthisfindingisthatourmodel–aswithmostotherresearchinthisfield–isashort-

termmodelonly.Theremaybedynamiceffectsthatrevealthemselvesovertime.This

wouldbeaproductivelineofinquiryforfutureresearch.

Thegoodnessoffitmeasuresshowsthatwehaveafairlygoodmodelofhousingpricesand

asufficientmodeloftheotherdependentvariablesinthesystem.Onemayquestionthe

loworevennegativeR2valuefortheTaxRatevariable.Thoughthisvariableisimportant

inthemodeltoassessjurisdictionalresponses,itisdifficulttomodelthisvariable.We

examinedtaxratechangesinthesample.Inmostcases,theannualchangesintaxrates

wereverysmall,sotheyaredifficulttomodel.Tous,thisindicatessupportforourstory,

namelythatthereisnoevidencethatjurisdictionsarechangingtaxratesinasubstantial

wayinordertoaffectfiscaloutcomes.

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Table5.ResultsofEstimationofEquation(1).

DependentVariable IndependentVariableSURCoefficient(Z-stat.)

3SLSCoefficient(Z-stat.)

D.houseprice D.IncomePerCapita(000s) 0.210 0.214 (1.27) (1.29) D.Unempl -8.238 -8.235 (18.15)** (18.14)** Constant 3.359 3.351 (4.31)** (4.30)**D.log(AV) D.houseprice 0.002 0.002 (6.77)** (3.60)** Ratio(000s) 0.142 0.141 (0.73) (0.72) Constant 0.030 0.030 (1.93) (1.93)D.TaxRate D.log(AV) 0.178 1.818 (1.69) (0.41) D.IncomePerCapita(000s) -0.591 -0.574 (1.50) (0.52) D.Unempl 0.022 0.045 (1.58) (0.78) Constant 0.022 -0.053 (0.92) (0.29)D_FirstYearCollections D.IncomePerCapita(000s) -0.085 -0.085 (3.24)** (3.24)** D.Unempl -0.103 -0.102 (2.26)* (2.24)* Constant 0.136 0.136 (1.74) (1.74)N 994 994R2forDep.Variables(significanceofχ2)

D.houseprice 0.258** 0.258**D.log(AV) 0.043** 0.043**D.TaxRate 0.007* -0.234D_FirstYearCollections 0.015* 0.015*

*p<0.05;**p<0.01

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References:

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Alm,J.,Buschman,R.D.,&Sjoquist,D.L.2014.“Foreclosuresandlocalgovernmentrevenuesfromthepropertytax:ThecaseofGeorgiaschooldistricts.”RegionalScienceandUrbanEconomics,46:1-11.

Alm,James,RobertD.Buschman,andDavidL.Sjoquist.2011.“Rethinkinglocalgovernmentrelianceonthepropertytax."RegionalScienceandUrbanEconomics,41(4):320-331.

Boyd,DonaldJ.andLucyDadayan.2009.“StateTaxDeclineinEarly2009WastheSharpestonRecord”.StateTaxNotes,54:305-325.

Boyd,DonaldJ.andLucyDadayan.2010.Revenuedeclineslesssevere,butstates’fiscalcrisisisfarfromover.RockefellerInstituteofGovernment,StateUniversityofNewYorkatAlbany.StateRevenueReport,79.Availableonlineat:http://www.rockinst.org/pdf/government_finance/state_revenue_report/2010-04-16-SRR_79.pdf

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Cromwell,ErichandKeithIhlanfeldt.2015.“Localgovernmentresponsestoexogenousshocksinrevenueresources:evidencefromFlorida.”NationalTaxJournal,68(2):339-376.

Doerner,WilliamM.andKeithR.Ihlanfeldt.2011.“HousePricesandLocalGovernmentRevenues”.RegionalScienceandUrbanEconomics,41:332-342.

Ihlanfeldt,K.R.,&Willardsen,K.2014.“Themillagerateoffsetandpropertytaxrevenuestability.”RegionalScienceandUrbanEconomics,46:167-176.

Ihlanfeldt,Kieth.2011.“Howdocitiesandcountiesrespondtochangesintheirpropertytaxbase?”TheReviewofRegionalStudies,41(1):27-48.

Lutz,Byron(2008).“TheConnectionbetweenhousepriceappreciationandpropertytaxrevenues”.NationalTaxJournal,61(3):555-572.

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Lutz,Byron,RavenMolloy,andHuiShan.2011.Thehousingcrisisandstateandlocalgovernmenttaxrevenue:Fivechannels.RegionalScienceandUrbanEconomics,41(4),306-319.

Mikesell,JohnL.andLiu,Cheoul.2013.“Propertytaxstability:ataxsystemmodelofbaseandrevenuedynamicsthroughthegreatrecessionandbeyond”.PublicFinanceandManagement,13(4):310-334.

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