Capitalization of state tax rates in housing values at state borders, 2000–2017

Abstract We derive a model that demonstrates the interrelationship between housing prices, tax rates, government services, and naturally occurring amenities between adjacent markets. The model is tested against county‐level data at state borders using US Census housing price data from 2000 to 2017. The data show that property taxes will lower housing prices at state borders by an average of $197 per mill rate or $3326 in 2017 prices. The capitalization rate of property taxes at state borders is 14.4%. The largest tax‐induced gap in average housing prices is at the New York–Connecticut border.