The housing crisis and state and local government tax revenue: Five channels

• Published in: Regional science and urban economics 2011-07, Vol.41 (4), p.306-319
• Main Authors: Lutz, Byron, Molloy, Raven, Shan, Hui
• Format: Article
• Language: English
• Subjects: Economic crisis; Economic Recession; Housing; Housing crisis; Housing Market; Local Government; Market analysis; Markets; Property Tax; Property taxes; Public revenue; Sales tax; Sales taxes; State and local taxation; State and local taxation Housing crisis Property tax Sales tax State income tax; State income tax; State taxes; Studies; Tax rates; Tax revenue; Tax revenues; Taxation; U.S.A; Values; Wealth
• ISSN: 0166-0462; 1879-2308
• DOI: 10.1016/j.regsciurbeco.2011.03.009

State and local government tax revenues dropped steeply following the most severe housing market contraction since the Great Depression. We identify five main channels through which the housing market affects state and local tax revenues: property tax revenues, transfer tax revenues, sales tax revenues (including a direct effect through construction materials and an indirect effect through the link between housing wealth and consumption), and personal income tax revenues. We find that property tax revenues do not tend to decrease following house price declines. We conclude that the resilience of property tax receipts is due to significant lags between market values and assessed values of housing and the tendency of policy makers to offset declines in the tax base with higher tax rates. The other four channels have had a relatively modest effect on state tax revenues. We calculate that these channels jointly reduced tax revenues by $22 billion from 2006 to 2009, which is about 3% of total state own-source revenues in 2006. We conclude that the recent contraction in state and local tax revenues has been driven primarily by the general economic recession, rather than the housing market per-se.