Association for Public Policy Analysis & Management

Can property tax exemption make cities more affordable? This paper examines this question using New York City's 421a property tax-exemption policy, intended to stimulate housing supply. The policy exempts residential property from increase in property taxes resulting from new construction, therefore, increasing the net return to new residential investment. A major 421a tax reform in 2006-08 provides variation in the treatment intensity of its tax benefits across time and space. Two results are noteworthy. First, using a bunching framework, I estimate that the citywide short-run housing supply is inelastic to the property tax rate at about 0.2. Second, using a difference-in-difference and differences in regression discontinuity design, I find that the reform induced increase in the supply of tax-exempt units, on average, increased the land, sales price of owner-occupied homes and particularly, the tax-inclusive local rents charged by the incumbent landlords in the treated regions, instead of decreasing them. Next, I explore the mechanisms that might potentially explain the positive effect of the increased supply on rents. I provide evidence consistent with the 'endogenous amenities’ hypothesis, where the increase in new tax-exempt housing units attracts richer households who increase demand for local goods and services, facilitates the entry of businesses and increases the amenity value of the region even further. Overall, the results do not lend support to the local affordability benefits of tax-free new residential investment, at least in the short run and in the present context.