Short and Long-Run Effects of Inter-governmental Redistribution of Property Tax on Housing Supply

This paper investigates the short and long-run effects of the inter-governmental redistribution of property tax on housing supply. For the short-run analysis, we leverage a property tax policy reform as an exogenous shock and use propensity score matching DID to establish the causal linkage between property tax redistribution and housing supply. We find that policy reform changes the behavior of local governments, internalizing fiscal competition between them and encouraging them to promote residential construction in order to increase revenues. For the long run analysis, we test for a dynamic spatial equilibrium where new construction is initiated to meet the demand of population growth and employment growth. We use cointegration analysis on spatial panel data. Our findings indicate that construction starts for residential buildings and commercial buildings are cointegrated with totally different variables. Residential construction is cointegration with property tax rates, resident income and population. Non-residential construction is cointegrated with a local authority's fiscal status and employment.We also simulate the property tax revenue redistribution effect of transfers from fiscally-independent cities to fiscally-weak and peripherally-located municipalities. Counterfactual exercises show that the redistribution effect promotes housing starts in peripheral localities and discourages non-residential building starts. The policy implications of these findings are discussed.