Paul L. Caron

Friday, January 8, 2021

Weekly SSRN Tax Article Review And Roundup: Kleiman Reviews Hayashi's Dynamic Property Taxes And Racial Gentrification

This week, Ariel Jurow Kleiman (San Diego) reviews a new work by Andrew T. Hayashi (UVA), Dynamic Property Taxes and Racial Gentrification (2020).


Four decades after California’s Prop 13 and the Tax Revolt it instigated, we are still unraveling the downstream consequences of property tax limits. Andrew Hayashi explores yet another unanticipated, if not surprising, consequence of property tax assessment limits in the context of gentrification. Combining theoretical reasoning with empirical data from Maryland, his approach is thoughtful and nuanced, reflecting the multilayered complexity underlying the economic and social processes at play.

The crux of his reasoning is the following. Property taxes are based on a property’s assessed value, which often differs from its market value. A relatively lower assessed value means a lower “effective tax rate” (ETR), since the ETR is measured against market value. Tax limits play an important role by limiting the government’s ability to assess properties at their market value, either imposing a maximum increase percentage or requiring that increases be phased-in over time. Regardless of the form, these limits cause lower ETRs for properties that are increasing in value compared to properties with stable or declining values. The more rapid the appreciation, the more pronounced the ETR gap.

Gentrification causes rapidly appreciating property values as wealthy residents move into lower-income neighborhoods, displacing long-term residents in the process. Thus, in gentrifying neighborhoods subject to assessment limits, properties should display relatively lower ETRs as assessed values fail to keep pace with market values. New entrants are likely to receive this tax goody, while displaced residents move to non-gentrifying neighborhoods and thus lose out. Where economic gentrification and racial gentrification overlap—think, white homeowners moving into historically black neighborhoods—these tax benefits may be disparately distributed by race.

As Hayashi notes, there is some evidence that white homeowners benefit from lower ETRs caused by assessment limits. However, the relationship in the context of gentrification is more complicated than cursory consideration might suggest. Hayashi offers a simple theoretical model to show how the distribution of tax savings from lower ETRs depends upon the rate of gentrification, the speed of housing price appreciation, the structure of assessment limits, and the extent to which lower ETRs are capitalized into housing prices (that is, whether buyers pay a premium for the tax benefit).

Imagine, for instance, that housing prices rise very quickly after only minimal gentrification and displacement, perhaps because the market correctly anticipates continued gentrification. In that case, existing homeowners will benefit from property value appreciation and lower ETRs. If existing homeowners are black or Latinx, for example, then white homeowners may benefit relatively less from lower ETRs. On the other hand, if existing homeowners are displaced very quickly, the new, white homeowners will reap larger tax subsidies. Then again, if the tax benefits are capitalized into home prices, displaced nonwhite homeowners may recoup some of the lost tax benefits when they sell their homes.

This cogent modeling of a complex process is thought provoking, but it is Hayashi’s normative discussion that is especially compelling. In particular, he considers why disparate ETRs may be cause for concern. Under certain circumstances, as briefly explained above and elaborated in the article, lower ETRs may operate as a temporary subsidy from old to new residents, which often means from black to white homeowners. But, the presence of such a subsidy need not be seen as normatively undesirable. As Hayashi explains, if property value appreciation reflects community mobilization for improved neighborhood services, then a lower ETR subsidizes positive behavior.

More concerning, however, Hayashi cites to a robust body of research suggesting that higher property values during gentrification may partly reflect buyers’ preferences for majority white neighborhoods. In such cases, lower ETRs subsidize racial preferences and reward racial displacement—a troubling result. Enacting an explicit subsidy for racial preference would be unthinkable. Yet, maintaining such a policy through longstanding tax limits seems unavoidable.

Hayashi finishes by offering empirical evidence from Maryland for the years 2008 and 2017. He finds some evidence to support the reasoning laid out in the paper, and especially the complexity underscored by his discussion. For instance, he reports regression results finding that an increase in white residents is associated with lower assessment ratios (and thus greater tax savings) in certain neighborhoods. Other evidence is more mixed. For 2008, he finds that white Maryland residents received a greater proportionate share of tax savings arising from artificially lowered assessed values, compared to black and Asian residents. The disparity disappears in 2017, however, when each racial group received benefits commensurate with their proportion of the population.

Hayashi’s work is a valuable complement to other work in this area. This complementarity is particularly true because not all states impose assessment limits, yet researchers have found evidence of racially disparate property tax burdens in many states. For instance, other research finds that black homeowners face relatively higher property taxes because tax assessors overlook racially correlated differences in local public goods, and because white homeowners are more likely to dispute assessed values and to be successful in such disputes. These pathways suggest a different policy response than that suggested by Hayashi’s work. Given the complexity involved, multiple pathways are not only possible, but probable. Regardless of the cause, policy responses must be guided by careful, nuanced analysis, of which Hayashi’s is a paradigm.

Here’s the rest of this week’s SSRN Tax Roundup:

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