Impact of a Two-Rate Property Tax on Residential Densities

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Municipalities sometimes reform property tax schedules in an effort to increase suboptimal residential densities. One such approach is to reduce the tax rate applied to building values and increase the tax rate applied to land, known as a two-rate property tax (TPT). This paper evaluates the impact of a TPT on residential density in Nashville-Davidson County, Tennessee where a conventional property tax schedule prevails during 2006–2007. When land taxes are proportionally higher than taxes on structures, 1.07 to 1 and 1.25 to 1 for general and urban service districts, respectively, ex ante simulations suggest that housing density increases by 18% in general services districts and 83% in urban services districts.

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