☀ Key Stats
◆ A 1-percentage-point increase in property taxes reduced house prices by an estimated 22.6% in the study’s preferred North Carolina analysis.
◆ The researchers estimate an implied 4.43% discount rate on the stream of future property tax payments.
◆ A separate nationwide analysis found that a 1-percentage-point higher property tax rate was associated with about 22% lower property values.
◆ In the authors’ California model, raising the effective property tax rate from 0.8% to 2.0% reduced average house prices by 12.6%.
◆ The modeled average California house price fell from $500,000 to $437,000, a decline of $63,000.
◆ With the housing stock held fixed, the modeled price decline was even larger at 15.1%, showing that an increase in housing supply was not responsible for the drop.
◆ When households were assumed to receive no value from the public services financed by the additional taxes, the modeled house-price decline increased to 14.3%.
◆ A doubling of property tax amounts was associated with a 4.3-percentage-point increase in homeownership among people aged 25–34 in Census data covering 2016–2021.
◆ The same tax increase was associated with a 3.2-point rise among people aged 45–54 and a 4-point decline for the oldest age group.
◆ Among North Carolina households that moved following reassessments, younger households moved to lots that were 18% larger, while older households moved to parcels that were 17% smaller.
◆ In the California model, homeownership among people aged 65 and older fell by about 6.2 percentage points, or 9.2%, while ownership increased slightly among younger households.
◆ Removing the step-up in tax basis at death in a separate model experiment reduced homeownership among people aged 75 and older by 11.8 percentage points, or 18.2%.
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A 1-percentage-point increase in property taxes cut house prices by an estimated 22.6% in the preferred analysis of a new NBER research paper.
The reason is not that higher taxes suddenly produced more homes.
Instead, buyers priced the larger stream of future property tax bills into what they were willing to pay for a house upfront.
A home with permanently higher annual taxes becomes more expensive to own even if the building itself is unchanged.
Buyers can respond by bidding less for the property, causing part of the future tax burden to be reflected in a lower sale price.
Economists call that process property-tax capitalization.
Future tax bills get priced into today’s house price
The researchers studied mass property reassessments in North Carolina that changed homeowners’ effective property tax burdens.
Their preferred statistical design estimates that a 1-percentage-point increase in the property tax rate reduced sale prices by 22.6%.
A percentage-point increase is much larger than a 1% relative increase.
For example, moving from a 1% property tax rate to 2% is a 1-percentage-point increase but a doubling of the tax rate.
The large price response reflects the fact that property taxes are recurring rather than one-time costs.
A buyer is not evaluating only the next tax bill but an expected stream of payments extending into the future.
The paper estimates an implied discount rate of about 4.43% when comparing that stream of future property taxes with the reduction in the upfront house price.
This is why an additional annual tax equal to 1% of property value can correspond to a price response far larger than 1%.
Buyers did not all have to leave the market for prices to fall
The mechanism does not require every prospective homeowner to decide against buying.
Prices can fall simply because buyers collectively become willing to offer less for properties carrying larger future tax obligations.
A buyer comparing two otherwise similar homes may value the one with the lower recurring tax bill more highly.
Sellers therefore may have to accept a lower upfront price to compensate buyers for the larger annual cost.
The researchers describe this tradeoff as a form of “embedded leverage.”
Higher property taxes mean paying less for the asset upfront in exchange for committing to a larger stream of future payments.
A national comparison found a similar 22% relationship
The paper also examines housing values across the United States to see whether the North Carolina result appears in broader data.
After controlling for housing and local-area characteristics, a 1-percentage-point higher property tax rate was associated with about 22% lower property values.
The researchers also found lower house price-to-rent ratios in places with higher property tax rates.
That is consistent with the idea that the tax liability is being priced into the value of owning the property rather than simply reflecting cheaper local housing markets.
The authors found stronger evidence of capitalization in areas where housing supply was less responsive.
When supply is more flexible, part of a change in housing demand can instead show up through changes in the amount of housing available.
California model cut prices 12.6%
The researchers then built a model to examine a much larger property-tax change in California.
The experiment increases California’s calibrated effective property tax rate from 0.8% to 2.0%, matching the Texas rate used in the model.
Average modeled house prices declined by 12.6%, from $500,000 to $437,000.
That result is smaller than the 22.6% North Carolina estimate because the model allows several other parts of the housing market to adjust.
Households receive some value from the public services financed by property taxes, which offsets part of the added tax burden.
The housing stock can also respond to lower prices and higher ownership costs.
More housing supply did not cause the price decline
The model provides a useful test of whether the lower prices were simply caused by additional housing construction.
They were not.
When the researchers prevented the housing stock from changing at all, prices fell by an even larger 15.1%.
That compares with the 12.6% decline in the baseline model where housing supply is allowed to respond.
In the authors’ model, lower house prices can make construction less attractive, allowing part of the adjustment to occur through a contraction in the housing stock.
A more flexible housing supply therefore tends to weaken the amount of the tax increase that is capitalized into lower prices.
The result is the opposite of a story in which higher property taxes create a building boom that pushes prices down.
Public services can offset part of the tax burden
Property taxes also finance local public services, so the paper does not treat every additional dollar of tax as a pure loss to homeowners.
If residents value the services the tax finances, they may be willing to pay more for the property than they would if the tax produced no benefit.
The authors demonstrate this by changing that assumption in the California model.
When households receive no value from the additional public services, the house-price decline grows from 12.6% to 14.3%.
The stronger the perceived value of the services, the less of the tax increase needs to be offset through a lower purchase price.
Lower prices can reduce the downpayment hurdle
The lower upfront price creates an unusual consequence for younger households.
They still face a larger annual property tax bill, but they may need substantially less cash to buy the home in the first place.
The model uses a conventional 20% downpayment requirement.
On a $500,000 home, that would require $100,000 upfront.
At the modeled post-tax price of $437,000, a 20% downpayment would fall to $87,400, or $12,600 less cash upfront.
The buyer has not escaped the housing cost; some of it has effectively shifted from today’s purchase price into future tax payments.
That trade can be particularly valuable to households with enough income to make recurring payments but too little accumulated wealth for a large downpayment.
Young homeownership rose where property taxes increased
The researchers also examined five-year changes in property taxes and homeownership using American Community Survey data from 2016 to 2021.
A doubling of property tax amounts was associated with a 4.3-percentage-point increase in homeownership among people aged 25–34.
Homeownership among people aged 45–54 increased by 3.2 percentage points.
The oldest age group moved in the opposite direction, with homeownership declining by about 4 percentage points.
The increase was particularly concentrated among households with relatively high income but limited financial wealth.
That pattern is consistent with the paper’s explanation that lower prices can help households whose main obstacle to ownership is accumulating enough cash upfront.
Older households faced the other side of the tradeoff
Older homeowners typically do not benefit from a lower purchase price on a house they already own.
They do, however, face the larger recurring tax bill.
Among movers affected by North Carolina reassessments, younger households moved to lots that were about 18% larger.
Older households moved to parcels that were about 17% smaller.
The authors interpret that pattern as evidence that higher holding costs can encourage older homeowners to downsize.
In the California model, homeownership among people aged 65 and older declined by about 6.2 percentage points, or 9.2%.
The overall homeownership rate fell slightly, so the paper does not argue that higher property taxes increase homeownership for everyone.
Its central result is instead a reallocation of housing toward younger households and away from older owners.
Another tax rule can keep older owners in their homes
The researchers also modeled the effect of removing the step-up in cost basis for housing passed to heirs at death.
Under that experiment, accrued housing gains would be taxed at death rather than receiving a reset in tax basis.
Homeownership among people aged 75 and older fell by 11.8 percentage points, or 18.2%.
Homeownership among people younger than 45 increased by 1.42 percentage points, or 3.1%.
The authors argue that the existing tax treatment of inherited housing can create an additional incentive for elderly owners to retain homes until death.
✦ Why it matters ✦
Housing affordability is often judged by the price listed on the property.
This study shows why that price can be misleading when recurring property taxes differ substantially between places.
A home with a lower sticker price but a large annual tax bill is not necessarily cheaper over the life of ownership.
Part of what looks like a cheaper house may simply reflect future housing costs being moved out of the purchase price and into recurring taxes.
That distinction matters because households do not all face the same financial constraints.
A younger buyer may earn enough to cover a mortgage and property taxes but still struggle to accumulate tens of thousands of dollars for a downpayment.
For that household, shifting some housing cost from the upfront price into future payments can make purchasing possible even if the lifetime cost has not fallen by the same amount.
For an older homeowner already living in the property, the same change can have the opposite effect.
The lower sale value offers little immediate help, while the larger annual property tax increases the cost of remaining in the home.
The paper therefore reframes property taxes as more than a question of whether homeowners pay more or less tax.
They can also influence when housing costs are paid, who can overcome the upfront cost of buying and which generations continue to hold the housing stock.
ⓘ How to read the findings
The paper combines empirical estimates and model simulations, and the two should not be interpreted as equivalent evidence.
The headline 22.6% house-price result comes from the authors’ preferred quasi-experimental analysis of mass property reassessments in North Carolina.
The authors compare the stream of future property tax payments with the upfront reduction in property value and calculate an implied discount rate of 4.43%.
A 1-percentage-point tax increase is not a 1% relative increase. Moving from a 1% property tax rate to 2%, for example, is a one-point increase and a doubling of the rate.
The broader national finding of about 22% lower property values is a cross-sectional association and does not carry the same causal interpretation as the North Carolina reassessment design.
The age-specific Census analysis uses five-year changes from 2016 to 2021 and examines a doubling of property tax amounts rather than a one-point increase in the property tax rate.
The California results are model-based counterfactuals. California did not actually raise its average property tax rate from 0.8% to 2.0% as part of this research.
The modeled 12.6% house-price decline reflects a new equilibrium in which household decisions, rents, housing supply and other variables are allowed to adjust.
Housing supply does not explain the price decline through increased construction. With the housing stock fixed, the model produces an even larger 15.1% price decline.
When households are assumed to receive no benefit from the public services financed by property taxes, the modeled price decline rises from 12.6% to 14.3%.
The model includes loan-to-value and payment-to-income borrowing constraints and uses a 20% minimum downpayment in its baseline calibration.
The authors’ phrase “embedded leverage” describes lower upfront purchase prices being exchanged for a larger stream of future property tax payments.
The model does not predict that higher property taxes raise homeownership overall. Aggregate ownership declines slightly while housing shifts toward younger households and away from older ones.
The size of the modeled effects depends on assumptions about housing supply, mortgage constraints, interest rates, public services and other features of the housing market.
The step-up-basis results are also simulations rather than the observed effects of a nationwide policy change.
NBER Working Paper 35587 was released in August 2026 and has not been peer-reviewed through the review process accompanying official NBER publications.
