The welfare effects of property tax classification in an urban area

Abstract

Taxing different classes of property at different effective rates is a widespread occurrence in the United States, even though the practice violates many state constitutions. For purposes of tax discrimination, urban real property is commonly divided according to the use to which the property is applied. Typically, the major property categories considered are residential and business, or residential, commercial, and industrial. This thesis investigates the structural and welfare effects of a change from a tax structure in an urban area that classifies property by use for tax purposes to one that does not discriminate in its treatment of property. To accomplish this, long run equilibrium models of urban spatial location are developed. In all models wage rates, and for one model output price of a composite commodity produced in the urban area, can vary in response to the change in tax policy. Conditions guaranteeing the existence of equilibrium for some of the models are developed, and proofs of the existence of equilibrium for those models are provided. Due to the analytical intractability of the models, the tax policy changes are simulated numerically through the use of a fixed point algorithm. The models are stylized, to the extent possible, to the Boston metropolitan area. In particular, the classification tax structure and parameterization of the functions of the model are chosen so that a resultant equilibrium resembles the Boston metropolitan area in or around 1980. General equilibrium versions of compensating and equivalent variations in income are used as measures of welfare change. The qualitative welfare results obtained are quite robust. In all of the simulations conducted there is a welfare gain in moving from the particular classification tax structure used to one in which all property is taxed at the same effective rate.