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You Can Take It with You: Proposition 13 Tax Benefits, Residential Mobility, and Willingness to Pay for Housing Amenities

Working paper #526
Fernando Vendramel Ferreira

In 1978, Californians approved Proposition 13, which fixed property tax rates at 1% of housing prices at the time of purchase. Beyond its fiscal consequences, Proposition 13 created a lock-in effect on housing choice because of the implicit tax break enjoyed by homeowners living in the same house for a long time. In this paper, I provide estimates of this lock-in effect, using a natural experiment created by two subsequent amendments to Proposition 13 – Propositions 60 and 90. These amendments allow households headed by an individual over the age of 55 to transfer the implicit tax benefit to a new home. I show that mobility rates of 55-year old homeowners are approximately 25% higher than those of 54 year olds. The second contribution of this paper is the incorporation of transaction costs, due to Proposition 13, into a household location decision model. The key insight of this model is that because of the property tax laws, different potential buyers have different user costs for the same house. The exogenous property tax component of this user cost then works as an instrument to solve the main identification problem of revealed preference models – the correlation between price and unobserved quality of the product. I find that marginal willingness to pay estimates for housing characteristics are approximately 100% upward biased when the model estimates do not account for the price endogeneity.

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