Land Taxes and Housing Prices

Abstract:
We use a unique data-set to examine to what extent changes in the Danish land tax are capitalized into house prices. The Danish local-government reform in 2007, which caused tax increases in some municipalities and tax decreases in others, provides plenty of exogenous variation, thus eliminating endogeneity problems.
The results imply full capitalization of the present value of future taxes under reasonable assumptions of discount rates. Consequently it gives an empirical confirmation of two striking consequences of a land tax:
Firstly, it does not distort economic decisions because it does not
distort the user cost of land.
Secondly, the full incidence of a permanent land tax change lies on the owner at the time of the (announcement of the) tax change; future owners, even though they officially pay the recurrent taxes, are not affected as they are fully compensated via a corresponding change in the acquisition price of the asset.