The Behavioral Response to Housing Transfer Taxes: Evidence from a Notched Change in D.C. Policy

Abstract

This paper estimates the behavioral response to residential real estate transfer taxes by studying notched tax rate changes in Washington D.C., exploiting both a price and time notch as identifying variation. We provide evidence that there is manipulation of the sales price to the lower-tax-rate region around the price notch, and use this manipulation to show that there was significant awareness of the tax changes and the incentives they created. We find some less compelling evidence of a change in the timing of house sales to beat the tax increase. Finally, we construct difference-in-difference estimates to examine whether there is a lock-in effect in the volume of house sales away from the price and time notches; we find no evidence of a lock-in effect in this setting.

Keywords: housing transfer taxes, lock-in, tax notches

JEL Classification: H2, H31, H71