Capitalization of Property Taxes in

Capitalization of the property tax is of particular interest in Norway since many local governments decide not to have a property tax. We apply a rich data set of housing transactions and characteristics for three years (1997- 1999) and combine them with local government-level data about property taxation, local services, and community characteristics. The analysis of capitalization faces serious methodological challenges of endogeneity and backgroundfactorsaffectinghousingpricesandlocalfiscaldecisions.Weinves- tigatetherelationshipbetweenpropertytaxandhousingpricesusingavariety ofeconometricspecificationsandusinginstrumentsforpropertytaxation.The results indicate that housing prices respond to property taxation and with full capitalization at realistic discount rates. High child care coverage also contri- butes to high housing prices. The existence of capitalization effects suggests thathousingmarketsreflectlocalfiscalconditionsandthatresidentialmobility is of importance to understand local government resource use.