Mansion Tax: The Effect of Transfer Taxes on the Residential Real Estate Market

Abstract

Houses and apartments sold in New York and New Jersey at prices above $1 million are subject to the so-called 1% "mansion tax" imposed on the full value of the transaction. This policy generates a discontinuity (a "notch") in the overall tax liability. We rely on this and other discontinuities to analyze implications of transfer taxes in the real estate market. Using administrative records of property sales, we find robust evidence of substantial bunching and show that the incidence of this tax for transactions local to the discontinuity falls on sellers, may exceed the value of the tax, and is not explained by tax evasion (although supply-side quality adjustments may play a role). Above the notch, the volume of missing transactions exceeds those bunching below the notch. Interpreting our results in the context of an equilibrium bargaining model, we conclude that the market unravels in the neighborhood of the notch: its presence provides strong incentive for buyers and sellers in the proximity of the threshold not to transact. This effect, the identification and recognition of which is novel to this paper, is above and beyond the standard extensive margin response. When present, unraveling affects interpretation and estimation of bunching estimates. Finally, we show that the presence of the tax affects how the market operates away from the threshold-taxation increases price reductions during the search process and in the bargaining stage and weakens the relationship between listing and sale prices. We interpret these results as demonstrating that taxation affects the ultimate allocation in this search market. Short Abstract (100 words)Using discontinuities in housing transaction taxes in New York and New Jersey we find robust price bunching. Incidence for transactions local to the notch falls on sellers, with no evidence of evasion. The volume of missing transactions above the notch exceeds those bunching (beyond the usual extensive-margin response), indicating incentives for buyers and sellers not to transact (market unravels). The possibility of unraveling affects interpretation and estimation of bunching.Away from the threshold, we find increased discounts and weaker relationship between listing and sale prices. Equilibrium bargaining framework highlights that taxation affects the ultimate allocation in this search market.

Tax-Driven Bunching of Housing Market Transactions: The Case of Hong Kong

“…This further facilitates the comparison. 15 A merit of using the housing price level instead of log house price is that we can obtain both positive and negative "pricing errors". In other words, our formulation allows for both "overpricing" and "underpricing".…”

Under the Radar: The Effects of Monitoring Firms on Tax Compliance

“…Two recent working papers, Best and Kleven (2015) and Kopczuk and Munroe (2015) study notches generated by property transaction taxes. 5 Carrillo, Pomeranz, and Singhal (2014) show the limitations of third-party reporting to tax the full corporate income in Ecuador.…”

Causal Inference in Urban and Regional Economics

“…Assuming everything else constant, any differences between the amount of bunching observed in the data and the amount that would be implied by the model in the absence of the policy kink can be attributed directly to the policy variation around the kink. Recent applications of this approach to housing markets include Best & Kleven (2014), Kopczuk & Munroe (2014) and Defusco & Paciorek (2014).…”