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:
- Irene Agnolucci (King’s College London), Turnover-Based Taxes in EU State Aid Control: The ‘Hypothecation Test’ and Its Relationship With Free Movement, 2 Eur. State Aid L. Q. 193 (2020)
- Kay Blaufus (Leibniz Univ. Hannover), Frank Hechtner (Friedrich-Alexander-Univ. Erlangen-Nürnberg) & Janine Jarzembski (Leibniz Univ. Hannover), Do Better Tax Agency Services Improve Taxpayer Compliance? Evidence from Germany (2020)
- Wouter Bossu (IMF), Cory Hillier (IMF) & Wolfgang Bergthaler (IMF), Local Currency Bond Markets Law Reform: A Methodology for Emerging Markets and Developing Economies, IMF Working Paper No. 20/258 (2020)
- John R. Brooks (Georgetown), The Tax Treatment of Student Loan Discharge and Cancellation, Student Borrower Protection Center Research Paper (2020)
- Yunho Cho (Inst. Econ. & Soc. Research), Shuyun May Li (Univ. Melbourne) & Lawrence Uren (Univ. Melbourne), Investment Housing Tax Concessions and Welfare: Evidence from Australia, CAMA Working Paper No. 2/2021 (2021)
- Yunho Cho (Inst. Econ. & Soc. Research), Shuyun May Li (Univ. Melbourne) & Lawrence Uren (Univ. Melbourne), Stamping out Stamp Duty: Property or Consumption Taxes?, CAMA Working Paper No. 1/2021 (2021)
- Dane M. Christensen (Oregon), Hengda Jin (Utah), Suhas A. Sridharan (Emory) & Laura Wellman (Penn. State), Hedging on the Hill: Does Political Hedging Reduce Firm Risk?, Management Sci. (forthcoming 2020)
- Dane M. Christensen (Oregon), David G. Kenchington (ASU) & Rick C. Laux (Purdue), How Do Most Low ETR Firms Avoid Paying Taxes?, Rev. Accounting Stud. (forthcoming 2020)
- Nina Collum (none), Susan Jurney (Ok. City Univ.) & Mary Marshall (La. Tech Univ.), Investigating the Effect of Service Messages on Noncompliant Taxpayers’ Reactions to Declining Audit Effectiveness (2020)
- Wei Cui (Univ. British Columbia), Taxpayer Self-Inspections, Audits, and Optimal Tax Administration: Evidence from China (2020)
- Min Dai (Nat’l Univ. Singapore), Yaoting Lei (Nanchang Univ.) & Hong Liu (Wash. U.), Optimal Tax-Timing Strategy in the Presence of Transaction Costs (2020)
- Evan Eastman (Fl. State), Anne Ehinger (Fl. State) & Jianren Xu (Univ. N. Tex.), Enterprise Risk Management and Corporate Tax Avoidance (2020)
- Albert Feuer (Law Offices of Albert Feuer), How an ERISA Fiduciary May Try to Save the World, 48 Comp. Plan. J. 271 (2020)
- Heather M. Field (Hastings), Allocating Tax Transition Risk, 73 Tax Law Review (forthcoming 2020)
- Jan Hájek (Univ. Fin. & Admin.) & Karel Šafr, Jiří Rotschedl & Jan Cadil (Unicorn College), The Laffer Curve Decomposed, Ekonomický časopis (2020)
- Andrew Jackson (Broadbent Inst.) & Toby Sanger (Canadians for Tax Fairness), Policy Forum: The Case for an Annual Net Wealth Tax, 68 Can. Tax J. 835 (2020)
- David Kamin (NYU), How Far to Go in Reforming Taxation of Wealth: Revenue and Tax Avoidance, 168 Tax Notes (August 17, 2020)
- Cody Kessler (Legacy Tax + Trust Lawyers), Taxpayer Non-Compliance with Input Tax Credit Rules: Data and Policy Options for Canada, 68 Can. Tax J. 751 (2020)
- João Félix Pinto Nogueira (Univ. Cape Town), Tax Reactions to the SARS-CoV-2/COVID-19 Pandemic in Portugal (2020)
- Ganesh Rajgopalan (Independent), United Nations Model Tax Convention – Proposed Inclusion of Software in the Definition of Royalties in Article 12: Comments on the 2020 Discussion Draft (2020)
- Ross Riskin (Am. Coll. Fin. Servs.), Section 529 Plan Distributions and College Refunds for COVID-19, 169 Tax Notes 1595 (Dec. 7 2020)
- Viktor Shestak (Moscow State Inst. Int’l Rel.) & Liana Khalikova, Legal Liability for Tax Evasion in the USA, Topical Issues of Law and Law Enforcement, International Scientific and Practical Conference (2020)
- Suranjali Tandon (Nat’l Inst. Pub. Fin. & Pol’y), International Tax Reform Agenda post COVID-19 (2020)
- Viswanath Trivedi (York Univ.) & Amin Mawani (York Univ.), Impact of Tax Advisers and Corrupt Tax Auditors on Taxpayer Compliance, 68 Can. Tax J. 801-832 (2020)
- Maximilian Zieser (Vienna Univ. Econ. & Bus.), Perceptions of trust, power and tax compliance motivations among large businesses and their tax auditors, WU International Taxation Research Paper Series No. 2021_01 (2021)
https://taxprof.typepad.com/taxprof_blog/2021/01/weekly-ssrn-tax-article-review-and-roundup-kleiman-reviews-hayashis-dynamic-property-taxes-and-racia.html