The Impact of Two-Rate Taxes on Construction in Pennsylvania

The evaluation of policy-relevant economic research requires an ethical foundation. Classical liberal theory provides the requisite foundation for this dissertation, which uses various econometric tools to estimate the effects of shifting some of the property tax from buildings to land in 15 cities in Pennsylvania. Economic theory predicts that such a shift will lead to higher building activity. However, this prediction has been supported little by empirical evidence so far.

The first part of the dissertation examines the effect of the land-building tax differential on the number of building permits that were issued in 219 municipalities in Pennsylvania between 1972 and 1994. For such count data a conventional analysis based on a continuous distribution leads to incorrect results; a discrete maximum likelihood analysis with a negative binomial distribution is more appropriate. Two models, a non-linear and a fixed effects model, are developed to examine the influence of the tax differential. Both models suggest that this influence is positive, albeit not statistically significant.

Application of maximum likelihood techniques is computationally cumbersome if the assumed distribution of the data cannot be written in closed form. The negative binomial distribution is the only discrete distribution with a variance that is larger than its mean that can easily be applied, although it might not be the best approximation of the true distribution of the data. The second part of the dissertation uses a Markov Chain Monte Carlo method to examine the influence of the tax differential on the number of building permits, under the assumption that building permits are generated by a Poisson process whose parameter varies lognormally. Contrary to the analysis in the first part, the tax is shown to have a strong and significantly positive impact on the number of permits.

The third part of the dissertation uses a fixed-effects weighted least squares method to estimate the effect of the tax differential on the value per building permit. The tax coefficient is not significantly different from zero. Still, the overall impact of the tax differential on the total value of construction is shown to be positive and statistically significant.