Property Tax Web Series

Abstract

This paper provides new evidence that a landlord’s property tax bill does affect rent for new tenants, violating the law of one price. I investigate the effect of heterogeneous property tax shocks on rents using a unique, quasi-experimental setting in California. California’s Proposition 13 has created large discrepancies in property tax liability among otherwise similar rental units, and these discrepancies are exacerbated quasi-randomly around a sale. Using a novel, comprehensive dataset on new-tenant rents from the City of Berkeley, I find strong evidence that landlords faced with quasi-random, building-level property tax shocks pass through $0.50–$0.89 per $1 of the property tax shock to renters. The results are robust to the inclusion of landlord size, renovations around a sale, and a property’s purchase price. I propose and empirically motivate an explanatory model of heterogeneity in landlord sophistication that can rationalize the observed positive relationship between rent and property taxes.