When a neighborhood is determined to be gentrifying, a potential byproduct is the displacement of long-time residents and businesses. Higher mortgages and rents may be cited as a reason for that displacement, but what role do property taxes play in a neighborhood transforming from low value to higher value? This issue is examined in a recent Atlanta Fed Real Estate Research blog by research economist and assistant policy adviser Chris Cunningham, in light of news that several major U.S. cities are planning to reduce or freeze property tax assessments for long-time homeowners in certain gentrifying neighborhoods. In doing so, the cities aim to protect low- and middle-income homeowners unable to afford an increase in property taxes, and thereby slow the churning of these neighborhoods.
In his evaluation, Cunningham looks at the neighborhood gentrification dynamic—defined for these purposes as the change in relative house prices—in states that have capped how quickly an individual property's assessed value could increase and also those that limit growth in the property tax rate. Interestingly, the data show that assessment caps seem to accelerate gentrification rather than slow it. The author also studied the change in residents' median household income as a proxy for the time duration that existing residents remain in their homes. That analysis revealed median incomes did rise in gentrifying neighborhoods and rose faster in tracts subject to an assessment cap, though the difference is not significant. Cunningham points out that further research using more granular data is needed, and he concludes that "looking only at aggregate data, property taxes do not appear to be a primary driver of neighborhood change, and concerns about gentrification do not appear to warrant interfering with the assessment process."