February 21, 2018
State and local governments account for about 40% of all tax collections in the United States, but federal taxes command most of the attention in academic literature. This paper investigates the effect of state income taxes on home prices, and make several contributions.
First, empirically, it provides suggestive causal evidence that the elasticity of home prices with respect to state income taxes is large. Ultimately, however, the evidence is inconclusive; standard errors are large, and different specifications lead to different conclusions. This leads to a second contribution, which suggests that border-pair studies should be carefully tested before their conclusions are accepted.
Finally, using benchmark point estimates of the elasticity, the author argues that ignoring general equilibrium effects on other prices and quantities when evaluating government policy can lead to large errors in the calculation of the marginal value of public funds (MVPF) associated with a policy.
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