Property taxes and property values:: evidence from Proposition 21/2

We examine the effect of Proposition 2 1/2 on revenues and housing prices in Massachusetts. Communities that were initially constrained by the law saw large increases in state aid and the use of fees. We use these initial constraints as instruments for changes in other components of revenue while treating the change in the property tax as exogenously determined by Proposition 2 1/2. Our results strongly suggest that communities that were able to increase their property taxes more rapidly saw greater increases in their housing values in the period following passage of the law. (C) 2004 Elsevier Inc. All rights reserved.