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Estimating the Responsiveness of Residential Capital Investment to Property Tax Differentials

Jeremy R. Groves

February 2011, English

The New View of property tax incidence implies very specific impacts on the investment decision faced by developers and thus implications for tax policies enacted by local policy makers. Unfortunately, there is little to no conclusive evidence that the New View is valid and, if so, how significant the theatrical implications of the New View are in practice. This paper begins to fill this void by testing the main implication of the New View that higher (lower) than average property tax rates imply lower (higher) than average capital investment rates using data from three of the counties that make up the Saint Louis MSA. Using the total square footage of living space as a measure of capital investment, this paper shows that when using correct instruments for the property tax endogeneity, the tax elasticity of residential capital is about -0.20 and that this rate depends on the specific area by investigated.