From Byron Lutz:
Do low property taxes attract residential capital investment? This question is answered using an unusual school finance reform in the state of New Hampshire. The reform induced large shifts in property tax burdens and this shock is used to identify the empirical relationship between property taxes and new home construction. The estimates suggest that, in most of the state, communities with a reduced tax burden experience a substantial increase in residential construction. In the area of the state near the regionís primary urban center (Boston), however, the shock clears through a price adjustment – i.e. by capitalizing into property values. The differing responses are attributed to differing housing supply elasticities. Moreover, communities which experience a decrease in property tax burdens, and witness a surge in building activity as a result, increase the stringency of their land use regulation ña response likely to slow the growth in housing supply.
