Abate Your Enthusiasm: Three Essays on Philadelphia's Abatement Policy
Open AccessThis dissertation consists of three essays, each related to Philadelphia's abatement policy which exempts the value of new construction from 10 years of property taxes.The dissertation begins with an introduction that provides background on Philadelphia's abatement policy.The existing literature has failed to reach a consensus on the extent property taxes are capitalized into home prices. Chapter 1 discusses why the abatement policy provides an ideal natural experiment for testing the capitalization of property taxes. Chapter 1 uses a triple difference identification strategy and data from Zillow's ZTRAX database to estimate the effect of the tax benefits on the prices of new homes. The point estimate for the initial degree of capitalization is 104\%, consistent with full capitalization.The temporary nature of the tax benefits allows for an additional contribution to the literature. Chapter 2 estimates how the capitalization evolves over time. This is accomplished by measuring the effect of the abatement policy on the prices of homes of different ages using the same identification strategy used in Chapter 1. As abatements approach expiration, the tax benefits are significantly over-capitalized, meaning buyers are overpaying for soon-to-expire abatements. The remainder of Chapter 2 discusses various behavioral mechanisms that may drive this result. This discussion includes the new result that mortgage delinquencies rise around the time of abatement expiration.Finally, Chapter 3 examines the supply response to the enactment of the abatement policy in 2000. A theoretical model is developed and calibrated to estimate the impact on construction, prices, and tax revenue. The initial impact on construction is large; the long-term impacts are a slight increase in construction and a moderate decrease in the prices of existing homes. This is consistent with observational data showing a construction boom in Philadelphia in the 2000s. However, a synthetic control analysis of the effects of the policy cannot reject null results. This is because the construction boom in Philadelphia coincided with increases in similar cities. Chapter 3 concludes that the null results are likely due to new housing prices in Philadelphia being well below the cost of construction prior to the policy's implementation.
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