The History of Property Tax Capitalizationin Real Estate

This study examines the capitalization of property taxes in real property. Capitalization theory would suggest that property values depend on the level of public services and taxes within a community. Differences in taxes relative to public services should be reflected in property values. Studies on property tax capitalization have essentially tested the Tiebout hypothesis that allocative efficiency in the delivery of public services is achieved through a system of local governments. Some conclusions from the literature are: (a) the degree of capitalization depends on the elasticity of supply of housing. An increase in demand with inelastic supply will raise the price of housing whereas, with a perfectly elastic supply, a change in demand will not change price, (b) tax capitalization can “lock-in” homeowners and make it more difficult to move, (c) most studies measuring property tax capitalization have used two-stage least squares, and (d) the most typical empirical result has been partial capitalization.