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October 8, 2008

Housing and Property Tax Revenues: A Three-Year Fuse

Interesting new Federal Reserve Board paper out making the argument that changes in house prices hit property taxes -- and thus state coffers -- with a three-year lag. In other words, if you think states are suffering now, give it a little more time.

The Connection Between House Price Appreciation and Property Tax Revenues

Byron F. Lutz
2008-48

Abstract: This paper explores two aspects of the connection between property tax revenues and house prices. First, I estimate the elasticity of property tax revenues with respect to house prices. This elasticity does not necessarily equal one as governments may adjust effective tax rates to offset changes in property values. Second, I examine the timing of the relationship. Institutional features of the property tax make it unlikely that changes in house prices will immediately influence tax revenues. The results suggest that the elasticity eventually equals 0.4 and that it takes three years for house price changes to impact tax revenues.

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