Tax Policies and Residential Mobility

Governmental tax policies have direct consequences for public spending and the distribution of wealth among a country’s population. But unintended consequences may also occur as a result of the design of those policies. We illustrate the potential impact of such unintended consequences by analyzing differences in home ownership mobility in California, Illinois, and Massachusetts that appear to result from the distinct differences in the design of real estate tax polices across these states. California’s Proposition 13, which became law in 1978, limits the increase in real estate taxes to a maximum of 2% in any given year regardless of home value appreciation. With home value appreciation, Proposition 13 creates sizeable disincentives to move. The evidence from an analysis of single family home sales records in California, Illinois, and Massachusetts indicates that California’s homeowners are significantly less mobile than their counterparts in Illinois and Massachusetts. The lower mobility was clearly not intended by the passage of Proposition 13, though its impact on society is potentially very significant. We recommend that countries in the process of developing tax systems for residential real estate ownership (such as China, the countries of the former USSR, and many countries in Africa) take account of such originally unintended consequences.