Proposition 13 : An Equilibrium Analysis ∗

In 1978, California passed one of the most significant tax changes initiated by voters in the United States. Proposition 13 lowered property tax rates and restricted future property tax increases. In this paper, we study the implications of Proposition 13 on house prices, housing turnover, and household welfare. In our benchmark calibration, the introduction of Proposition 13 leads to a 25% increase in house prices and a 4% decrease in the moving rates. We find that elimination of Proposition 13 in a revenue-neutral way leads to small changes in house prices and modest increases in mobility but large welfare gains. ∗We thank Victor Rios-Rull, Stephen Ross, and the seminar and conference participants at the University of Connecticut; Notre Dame; Stony Brook; UC Berkeley; Philadelphia Fed; Rice; USC; and 25 Years of Stokey, Lucas, and Prescott Conference for their comments. We also thank Vuk Talijan for excellent research assistance. This research was partly supported by a grant from the USC Lusk Center. †Department of Finance and Business Economics, Marshall School of Business, University of Southern California, Los Angeles, CA 90089-1427. E-mail: [email protected] ‡GSA Capital Partners. 5 Stratton Street. London W1J 8LA. Email: [email protected]. §Department of Finance and Business Economics, Marshall School of Business, University of Southern California, Los Angeles, CA 90089-1427. E-mail: [email protected].