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Abstract
Due to outdated property assessment systems, property assessment does not match with transaction price in most cases. Assessment is used as a measurement of a property’s market price and property tax is a fixed portion of the assessment. The effective tax rate (rate of a property tax over a property’s market price), as a result, is unequal within jurisdictions. Philadelphia was one of those jurisdictions before 2014 and then improved substantially through the Actual Value Initiative in 2014. Using data on households’ residential address history and real estate tax and transaction records, I first show that property tax increases made homeowners more likely to move out and less likely to keep owning their properties. Then I construct a model characterizing households’ location and homeownership choices in equilibrium and estimate the model. The counterfactual analysis shows that if we correct the current unequal property tax system and change it to a flat-rate one, households will be more likely to be homeowners, especially low-income and less wealthy households. The welfare analysis shows such a change will increase the overall households’ welfare by 3.53%. Specifically low and middle-income households enjoy higher welfare gain while high-income households will get a slight welfare reduction. The government will get 23.64% more property tax income.