The behavioral response to housing transfer taxes: Evidence from a notched change in D.C. policy

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 then 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. Taken together, our results suggest that the welfare costs of a state introducing or eliminating a housing transaction tax are small.