Property taxation, capitalization, and the economic implications of raising property taxes

This study applies a hedonic pricing model to provide further empirical evidence whether, in the spirit of Tiebout (1956), Oates (1969), and Tullock (1971), property taxes in particular have been capitalized into housing prices in the city of Savannah, Georgia housing market. Estimating the model in semi-log form reveals (after allowing for a variety of factors, including 12 spatial variables, four of which are de facto Tiebout type variables) that the natural log of the real sales price of a single-family house in the city of Savannah environment was in fact negatively affected by the city and county property tax level. This study is prompted by the fact that city and county governments are facing serious financial challenges and are searching for viable revenue sources. Increasing property taxes is one of the potential revenue sources being considered by elected officials. In providing current evidence on the effects of property tax in particular and on the Tiebout hypothesis in general, we seek to alert city and state governments of the potential consequences and perils of property tax hikes.