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Research Seminars & Workshops @ IRES

Dr Lee Nai Jia
Department of Real Estate, NUS

Property Taxes under “Classification”: Why do Firms pay more?


05 February 2010 (Friday)


4.30 pm - 6.00 pm


RMI Seminar Room. Level 4
21 Heng Mui Keng Terrace


This paper examines how communities will behave if they are given the option of taxing the property of commercial establishments (factories, shopping centers, office buildings, etc) at different rates from residential housing. In the last 2 decades many states have enacted legislation which allows communities to discriminate in this manner – called “classification”. We build a simple model wherein firms provide tax revenue without using local services and also create a valuable local job base. Towns thus confront a well defined choice: raise commercial taxes and gain revenue but risk loosing jobs. Firms in turn need to choose a community to locate in but do so with a (finite) negative elasticity with respect to the town taxes. The model yields two schedules between commercial tax rates and firm concentration in a community. A “demand” schedule has greater firm concentration leading a town to select higher commercial taxes, while a “supply” schedule has higher taxes leading to less firm concentration. The model comparative statics suggest that wealthier communities will encourage firms by keeping taxes low and rely less on their tax subsidy. Empirically we create a panel of towns in Massachusetts that covers the years prior to and after the state allowed such tax discrimination. With this data we find that towns with more pre-existing commerce chose to discriminate most, that such higher taxes gradually do discourage firm location, and that wealthier towns tend not to engage in tax discrimination.

About The Speaker

Dr Lee Nai Jia researches in housing markets, local public finance, and urban economics. His future work interest involves is life cycle consumption of real estate and economic analyses of regional and local environmental policies. He holds a PhD in Urban and Regional Planning from MIT, and Masters in Real Estate from National University of Singapore.

For full paper, download here

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