“The Effects of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis”, 1969-11-01 (; similar):
This paper reports the findings of a cross-sectional study of the effects of local property taxes and local expenditure programs on property values.
Using the 2-stage least-squares estimation technique in an attempt to circumvent the likely presence of some simultaneous-equation bias, the regression equation indicates that local property values bear a statistically-significant negative relationship to the effective tax rate and a statistically-significant positive correlation with expenditure per pupil in the public schools. The size of the coefficients suggests that, for an increase in property taxes unaccompanied by an increase in the output of local public services, the bulk of the rise in taxes will be capitalized in the form of reduced property values. On the other hand, if a community increases its tax rates and employs the receipts to improve its school system, the coefficients indicate that the increased benefits from the expenditure side of the budget will roughly offset (or perhaps even more than offset) the depressive effect of the higher tax rates on local property values.
These results appear consistent with a model of the Tiebout variety in which rational consumers weigh (to some extent at least) the benefits from local public services against the cost of their tax liability in choosing a community of residence: people do appear willing to pay more to live in a community which provides a high-quality program of public services (or in a community which provides the same program of public services with lower tax rates).