PROPERTY TAX CAPITALIZATION IN REAL ESTATE VALUES: EVIDENCES FROM SÃO PAULO

This paper uses an unusual opportunity to estimate the capitalization of the property tax on property value. In 2002 the city of Sao Paulo changed the property tax structure moving from uniform rate to progressive with six different brackets. This is a unique opportunity since expenditure has not changed accordingly. A typical difficulty in estimating capitalization is that a change in property tax is followed by a change in expenditures. If capitalization occurs, progressivity would increases prices for the low end of the market and decreases price for the high end questioning eventually how progressive is the policy indeed. We compare the prices before progressivity is implemented with prices after the fiscal reform for the low and high end of the market showing that there is indeed capitalization in the case of Sao Paulo. We test the robustness of this result and then discuss the consequences of such finding for urban policy.