A Markov Chain Monte Carlo Analysis of the Effect of Two-Rate Property Taxes on Construction
Uses data from 15 Pennsylvania municipalities (1972–1994) to show that a higher tax rate on land relative to buildings significantly increases construction activity.
Summary
Plassmann and Tideman's 2000 Journal of Urban Economics paper provides the strongest multi-municipality empirical evidence that split-rate (two-rate) property taxation increases building. Where the Pittsburgh study examined one city, this paper exploits variation across many.
Method
The authors assembled data on building permits from 15 Pennsylvania municipalities that taxed land at a higher rate than improvements, covering 1972–1994. Pennsylvania is uniquely suited to this analysis because state law permits cities to set separate land and building rates, creating a natural experiment with many cases and degrees of variation. The authors use Bayesian Markov Chain Monte Carlo methods to estimate the effect while handling the statistical difficulties of the panel.
Key Finding
A higher tax rate on land, relative to the rate on structures, is associated with a statistically significant increase in the number and value of building permits. The effect operates in the direction Georgist theory predicts: shifting the tax burden off improvements and onto land encourages development.
Bears On
Sources
- Florenz Plassmann & Nicolaus Tideman (2000), "A Markov Chain Monte Carlo Analysis of the Effect of Two-Rate Property Taxes on Construction," Journal of Urban Economics 47(2):216–247. Publisher
- Companion single-city case: Oates & Schwab (1997) — wiki summary