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The Housing Crisis, Foreclosures, and Local Tax Revenues

James Alm () and J. Sebastian Leguizamon ()
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J. Sebastian Leguizamon: Western Kentucky University

No 1803, Working Papers from Tulane University, Department of Economics

Abstract: The housing crisis that began with the "Great Recession" led to a dramatic increase in home foreclosures, and these foreclosures likely had subsequent impacts on local government tax revenues. We investigate the impacts of foreclosures on local government tax revenues, using a reduced form estimation approach that relates changes in foreclosures to changes in local government tax revenues. Unlike most previous work, we examine the nationwide revenue impacts of foreclosures, using data across all local governments in the entire United States during the worst years of the Great Recession. We also examine the impacts of foreclosures on other local government sources of revenues beyond property tax revenues, including revenue sources that were likely affected by the impacts of foreclosures both on household wealth and on other forms of economic activity. Further, we focus in some specifications on the revenue effects for school districts only. Finally, we extend our analysis to the impacts of foreclosures on state governments revenues (and expenditures). Throughout, we use an instrumental variable approach to control for possible endogeneity of foreclosures and housing prices. Overall, we find evidence that the foreclosures created by the Great Recession had a direct, negative, but small effect on total tax revenues at the local level, although there is only weak evidence that this impact can be attributed to declines in local property taxes. However, we find that foreclosures had an indirect and negative impact on local governments via declines in state government funding. We suggest that foreclosures may have affected the real economy, thereby reducing the state government revenues dependent on real economic activity that were used to finance transfers to local governments.

Keywords: Foreclosures; property taxation; local government; intergovernmental transfers (search for similar items in EconPapers)
JEL-codes: H2 H7 R3 R5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pub and nep-ure
Date: 2018-03
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http://repec.tulane.edu/RePEc/pdf/tul1803.pdf First Version, March 2018 (application/pdf)

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