The impact of property tax incentives on residential investment

We estimate the short- and long-run impacts of a property tax reform in New York City (NYC) on the construction of new rental apartments. The reform, announced in 2006 and implemented in 2008, imposed new requirements to claim a property tax exemption. To estimate the short-run impacts, we use the delay between the announcement and the implementation of the reform to estimate the excess housing starts in response to a future property tax increase. We find that the tax reform induced excess building starts of 10,735 new rental units, equivalent to 1% of the 2007 rental housing stock. To estimate the long-run impacts, we use a difference-in-differences (DiD) strategy comparing census tracts in regions where the new requirements to obtain the tax exemption were stringent vs. tracts in regions where the new requirements were lenient. We find that the tracts with new strict requirements built 0.58 to 0.81 (22.25 to 22.75) more new buildings (new rental units) relative to the comparison group census tracts. These estimates represent 0.3x to 0.4x (2.4x to 2.5x) the median number of new buildings (rental units) per census tract per year in the 2003–15 sample period. Our findings yield two conclusions. First, a property tax reform can increase residential investment in the long run, even if a grace period produces a temporal boom and bust in construction. Second, local tax policy is a key determinant of housing supply in cities with high density and land scarcity.