Property Taxation, Housing and Local Labor Markets: Evidence from German Municipalities

We analyze the incidence and the welfare implications of property taxation. We suggest a novel theoretical perspective by introducing property taxes in a spatial equilibrium model, where workers and firms are mobile but have location-specific preferences, and where tax revenues finance local public goods. The model predicts that welfare effects of property taxation depend on four reduced-form elasticities. We estimate these elasticities using an event-study design and exploiting the institutional setting of municipal property taxation in Germany with more than 31,000 tax reforms in the years between 1992–2017. Our results imply that renters bear one fifth, firm owners about one third, and land owners more than 40 percent of the welfare loss of property tax increases.