The effect of change in the property tax: evidence from the Swedish taxation reform* Timotheos Mavropoulos 1 This version: October 16, 2014 Preliminary draft Abstract The paper investigates the effect of the property taxation reform introduced in Sweden after April 2007 on the market price of the affected properties (one-family houses). Inference is focused on discount rates, growth rates and the implied degree of tax capitalization. Stronger results for the capital compared to the rest of the country underline the importance of land scarcity for the degree of tax capitalization. *I would like to thank Peter Englund for his advice during the completion of this term paper and encouragement whenever I found obstacles in proceeding. I would also like to thank Valueguard AB and in particular Lars-Erik Ericson for his support in data extraction process. Gratitude goes to participants of the NFN PhD conference 2014 and Kristian Miltersen (Copenhagen Business School). 1 Stockholm School of Economics (email: [email protected])
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The effect of change in the property tax: evidence from the Swedish
taxation reform*
Timotheos Mavropoulos1
This version: October 16, 2014
Preliminary draft
Abstract
The paper investigates the effect of the property taxation reform
introduced in Sweden after April 2007 on the market price of the
affected properties (one-family houses). Inference is focused on
discount rates, growth rates and the implied degree of tax
capitalization. Stronger results for the capital compared to the rest of
the country underline the importance of land scarcity for the degree
of tax capitalization.
*I would like to thank Peter Englund for his advice during the completion of this term paper and encouragement
whenever I found obstacles in proceeding. I would also like to thank Valueguard AB and in particular Lars-Erik Ericson
for his support in data extraction process. Gratitude goes to participants of the NFN PhD conference 2014 and Kristian
some point abolished but no details were provided (2006/07:1, volym 1, s. 147). The projection was that
“the reform will be implemented during fiscal year 2008”.Later on, the Proposition 2006/07:100 dated 10th
of April 2007mentioned that the property tax will be abolished (effectively from the taxation year 2008) and
substituted with a “fee”(“fastighetsavgift”). The proposal was to make it 0.75% of Tax Assessed Value up to
SEK4.500, with the details to be announced and discussed until the fall. It was also mentioned that the
reform would be funded "within the sector" but did not describe exactly how. Finally, Proposition
2007/08:27 dated 25th ofOctober 2007 announced the actual reform with the cap at SEK6.000 (increased
fromSEK4.500 announcedpreviously). The funding of the reform was planned through an increase of the
capital gains tax from 20% to 22% and the introduction of an 0.5% interest charge levied on the tax liability
when the capital-gains tax can be rolled forward, which is the case when it is reinvested in housing. From the
reform history it can be inferred that the reform dating is rather fuzzy, thus a definite pre-reform period can be
determined as the earliest possible period ranging from a newly-conducted assessment in 2006 (i.e. January
2006) till the earliest possible rumors about the reform. The problem is that the mentioned rumors may have
already started from October 2006, leading to a decision of making January 2006 the earliest possible pre-
reform period to examine the effect of the 2007 reform on a set of properties assessed during 2006 and
onwards.
Tax capitalization theory in the context of Swedish taxation reform
The standard model of property tax capitalization is presented in this section4. This model will be
modified to accommodate the effects of the Swedish property tax reform, and in particular the
discontinuous tax treatment after October 2007 of properties sold after the reform. A description of the
model departs from the idea that market value of the property equals to the present value of the stream of
housing services net of property tax obligations and then introduces the necessary features to account for
4To refer to a more thorough presentation of the basic model, see Ross and Yinger (1999) as well as Yinger(2005)
4
the reform. Assuming that constant continuous housing services R5 over the infinite lifetime of the house
embody all associated public services and other amenitiesnet of tax payment, then we can investigate the
effect of the reform in the following way. Before the reform the property tax was equal to 1% of the tax
assessed value, or 0.75% of the market value6. After the reform the property tax equals to 0.75% of tax
assessed value with a cap of SEK6.000 or, in terms of assessed value, SEK800.000. To illustrate the reform
effect on the tax payment, observe the graph below:
Graph 1. Tax reform illustration: tax assessed value in SEK plotted against corresponding tax obligations in SEK
The cap introduced by the reform establishes a decrease in tax obligations proportional to the properties’ tax assessed
value.
Expressing this in terms of market value before the reform with the real discount factor 𝑟 − 𝑔,
where constant growth rate of housing services g and the constant discount rate𝜌 are assumed, one gets:
MV0 =R0
ρ − g + 0,0075=
TAV
0,75
while after the reform, for the properties below SEK800.000 in tax assessed value:
5 Note that this assumption has implications for the resulting magnitude of tax capitalization. When land is scarce, the
total supply of land may be assumed to be fixed, with the long-run supply having positive slope. This, together with the long-run output growth in the economy which is likely to raise the total demand for land, is contributing to the increasing relative prices of land used for housing purposes, and hence the market price of houses. The housing services R in this case should adjust downwards due to an increased supply. As a result, the current theoretical calculations may overstate the resulting capitalization. 6Typically the assessment process aims to determine the assessment value at 75% of the market value one year before
the assessment is conducted. Property owners fill in the detailed questionnaire where the characteristics of the house via hedonic indices determine the property tax assessed value.
02000400060008000
100001200014000
Tax
ob
ligat
ion
in S
EK
Tax Assessed Value in SEK
Tax Reform Illustration
Tax before
Tax after
5
MV′ =R0
ρ − g + 0.75 ∗ 0,0075=
TAV(ρ − g + 0,0075)
0,75(ρ − g + 0.75 ∗ 0,0075)
and for the properties above SEK800.000 in tax assessed value and the tax cap of SEK6.000 (assuming the
cap also grows at rate 𝑔):
MV′ =R0
ρ − g−
6.000
ρ − g=
TAV(ρ − g + 0,0075)
0,75(ρ − g)−
6.000
ρ − g
The difference before and after the reform for the above SEK800.000 properties is thus:
MV′ −𝑀𝑉0 =TAV ρ − g + 0,0075
0,75 ρ − g −
6.000
ρ − g−
TAV
0,75=
0,01TAV
ρ − g−
6.000
ρ − g
Expressing the difference before and after in terms of a ratio, we have for the above SEK800.000 tax
assessed value properties:
𝑀𝑉′
𝑀𝑉0=
TAV (ρ−g+0,0075)
0,75(ρ−g)−
6.000
ρ−g
TAV
0,75
= 𝜌 − 𝑔 + 0.0075
𝜌 − 𝑔−
6.000 ∙ 0,75
TAV(𝜌 − 𝑔)
A table presenting the above ratio of capital gain MV ′
MV depending on different values of the real discount
factor ρ − g and the tax assessed value TAV is given below:
Table 1. Ratio of capital gain due to reform for the properties with the tax assessed value above SEK800.000
Graph 6.Coefficient β3 point estimates and confidence intervals over a 2006-2008 period, Stockholm
Graph 7.Coefficient β7 point estimates and confidence intervals over a 2006-2008 period, cap SEK4.500
Graph 8.Coefficient β7 point estimates and confidence intervals over a 2006-2008 period, cap SEK6.000
-1.5
-1
-0.5
0
0.5
1
1.5
-1.5
-1
-0.5
0
0.5
1
1.5
-1.5
-1
-0.5
0
0.5
1
1.5
Table 4. Coefficient β7, the cap of SEK4.500
Table 5. Coefficient β7, the cap of SEK6.000
Coefficient: β7 (TAV_x_dTr_x_dT)
Coefficient: β7 (TAV_x_dTr_x_dT)
Months 2006 2007 2008
Months 2006 2007 2008
Jan
0.121 0.292
Jan
0.358 0.535**
(0.286) (0.292)
(0.225) (0.271)
Feb 0.296 0.0606 0.229
Feb 0.127 0.475*** 0.390**
(0.269) (0.234) (0.246)
(0.221) (0.183) (0.185)
Mar -0.134 0.335 -0.198
Mar -0.0400 0.564*** 0.0171
(0.313) (0.241) (0.320)
(0.196) (0.188) (0.329)
Apr -0.251 0.181 0.168
Apr 0.252 0.407** 0.485***
(0.268) (0.240) (0.229)
(0.194) (0.185) (0.174)
Maj -0.0623 0.188 0.104
Maj 0.205 0.467*** 0.277
(0.264) (0.227) (0.262)
(0.195) (0.173) (0.247)
Jun -0.216 -0.0479 -0.173
Jun 0.329* 0.195 0.0911
(0.250) (0.264) (0.286)
(0.197) (0.251) (0.281)
Jul 0.0564 -0.268 -0.604**
Jul 0.230 -0.154 -0.513*
(0.254) (0.310) (0.281)
(0.203) (0.329) (0.270)
Aug -0.0819 0.315 -0.0994
Aug 0.135 0.504*** 0.197
(0.253) (0.223) (0.229)
(0.186) (0.177) (0.180)
Sep -0.0398 0.179 0.0471
Sep 0.176 0.522*** 0.406**
(0.246) (0.232) (0.228)
(0.178) (0.186) (0.182)
Okt -0.170 0.172 -0.127
Okt 0.201 0.526*** 0.191
(0.230) (0.223) (0.232)
(0.175) (0.177) (0.185)
Nov 0.0890 0.0654 -0.00662
Nov 0.191 0.241 0.311*
(0.256) (0.227) (0.225)
(0.188) (0.174) (0.177)
Dec -0.238 0.0749 0.154
Dec 0.138 0.457** 0.408**
(0.258) (0.239) (0.245)
(0.191) (0.178) (0.199)
N
86830
N
86830
R-squared 0.833
R-squared 0.834
Table 6.Coefficients β10 and β11 for the period 2006-2008
Year-Quarter Coefficient:
β10(TAV_T_Gr1) Coefficient: β11
(TAV_T_Gr3)
2006-Q2 0.0636 0.134
(0.151) (0.140)
2006-Q3 -0.0682 -0.0114
(0.143) (0.133)
2006-Q4 -0.181 -0.115
(0.134) (0.124)
2007-Q1 -0.123 0.139
(0.130) (0.121)
2007-Q2 -0.0608 0.360***
(0.127) (0.118)
2007-Q3 -0.0896 0.313**
(0.131) (0.122)
2007-Q4 0.000346 0.254**
(0.127) (0.118)
2008-Q1 -0.642*** -0.184
(0.129) (0.120)
2008-Q2 0.186 0.691***
(0.126) (0.116)
2008-Q3 -0.409*** 0.00123
(0.130) (0.122)
2008-Q4 -0.0561 0.174
(0.129) (0.121)
N 86830
R-squared 0.835
Tables show the median Tax Assessed Values and number of properties sold by sales year and assessment years. Last rows and columns are, correspondingly:
median TAV of the properties sold during the whole period, by assessment year (2003-2012), median TAV of the properties sold for all assessment years, by
The observations in bold, totaling 86.830, are the ones used in the regression analysis. Note from the first table that Median TAV of the properties sold
during the whole period and assessed in 2006 is 46% higher compared to the Median TAV of the ones assessed in 2005.
Tables show the median Tax Assessed Values and number of properties sold by sales month and assessment years. Last rows and columns are, correspondingly: -Median TAV of the properties sold in a particular year (2006, 2007, 2008), by assessment year (2003-2009) -Median TAV of the properties sold for all assessment years, by month (Jan-Dec 2006, Jan-Dec 2007, Jan-Dec 2008)
Sales 2006
Median TAV by: Assessment year
Sales 2007
Median TAV by: Assessment year
Sales 2008
Median TAV by: Assessment year
2003 2004 2005 2006 2007 2008
2003 2004 2005 2006 2007
2003 2004 2005 2006 2007 2008 2009
Jan 588000 614000 925000 1097000
678000
Jan 472000 640000 530000 933000 718667 758500
Jan 455000
420000 821000 760000
807500
Feb 630000 599000 698000 1124500
714000
Feb 481000 705000 502500 962000 818000 866000
Feb 618000 448000 387500 913000 795000 1122000
878000
Mar 627500 586000 673000 1057000
722000
Mar 455500 428500 452000 920000 865000 860000
Mar 476500 294000 1178000 871000 789000 1070000
839000
Apr 672000 518000 725000 1131000
754500
Apr 479000 443000 477000 923500 1409500 894000
Apr 952000 293000 524500 896500 908000 1242000
899000
May 661000 596000 668000 1130000
740000
May 564000 341500 521000 859500 578000 838000
May 682000 796500 472000 906000 894000 1457500
900000
Jun 597000 600500 661000 1077000
687000
Jun 622000 642000 506500 850000 1004000 841000
Jun 564000 732500 387500 840000 821500 623000 1827000 827500
The downward trend in TAV values during the sales period Jan2006-Jan2007 can be observed both for Assessment Year 2005 (from SEK 925.000 to SEK
530.000) and Assessment Year 2006 (from SEK 1.097.000 to SEK 933.000). Note from the first table that Median TAV of the properties sold in year 2006 and
assessed in 2006 is 68% higher compared to the Median TAV of the ones assessed in 2005.
Tables show the median Tax Assessed Values and number of properties sold by sales year and assessment years for Stockholm sample. Last rows and
columns are, correspondingly: median TAV of the properties sold during the whole period, by assessment year (2003-2012) and median TAV of the properties
sold for all assessment years, by year (2005-2012)
The observations in bold, totaling 3.160, are the ones used in the regression analysis. Note from the first table that Median TAV of the properties sold
during the whole period and assessed in 2006 is 23,9% higher compared to the Median TAV of the ones assessed in 2005.
Tables show the median Tax Assessed Values and number of properties sold by sales month and assessment years for Stockholm sample. Last rows and
columns are, correspondingly: median TAV of the properties sold in a particular year (2006, 2007, 2008), by assessment year (2003-2009) and median TAV of
the properties sold for all assessment years, by month (Jan-Dec 2006, Jan-Dec 2007, Jan-Dec 2008)
Note from the first table that Median TAV of the properties sold in year 2006 and assessed in 2006 is 17.4% higher compared to the Median TAV of the ones
assessed in 2005, while for the properties sold in year 2007 the corresponding increase is 43%.
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