Proposition 13: An Equilibrium Analysis

Abstract

There are many federal, state, and local laws that distort housing decisions and prices. However, it is often difficult to tease out the quantitative impact of such policies. In this paper, we examine the implications of one of the most significant tax changes initiated by voters in the United States on house prices, housing turnover, and household welfare. In 1978 California passed Proposition 13, which lowered property tax rates and restricted future property tax increases. We find that the introduction of Proposition 13 leads to a 15 percent increase in house prices and a 3.3 percent decrease in the moving rates. The elimination of Proposition 13, however, leads to modest changes in house prices and mobility but sizable welfare gains. (JEL E13, G21, H71, R21, R31)