In 2008, the Swedish property tax was reformed and a cap on yearly tax liabilities
was introduced. A large fraction of owner occupied houses was subject to a substantial
decrease in the tax. When the reform was announced, most analysts projected - in
line with tax capitalization theory - that the tax decrease would lead to signicant
increases in house prices. We estimate price responses and capitalization degrees,
using various DID strategies, in which the price dynamics of houses that were subject
to a generous tax reduction are compared to the price dynamics of houses with a more
modest reduction. Our results are largely inconsistent with capitalization theory. For
the majority of properties, we nd no evidence that the tax cut led to increases in
house prices. However, we nd evidence of partial capitalization in sub-markets with
highly valued properties, highly educated citizens and were it is especially dicult to
increase supply. We argue that theories of bounded rationality can help explain why
house buyers may fail to take a tax decrease into account in the valuation of houses.
2014. , 38 p.