Investigating the Links Between Air Pollution, Arnona Property Taxation and Housing Prices: A Hedonic Analysis of the Haifa Housing Market

Air pollution imposes measurable economic costs on housing markets, typically reflected in lower property values. While this negative capitalization is well documented, the interaction between environmental externalities and active municipal fiscal policy has received less empirical attention within the context of non-ad valorem systems, presenting a distinct area of study in urban economics. This study addresses this gap by examining the relationship between municipal taxation, air pollution, and housing prices in Haifa, Israel—a city operating under a distinctive, area-based property tax system (“Arnona”). Unlike ad valorem systems where tax liabilities adjust automatically to market shifts, the Arnona system requires administrative intervention to modify tax zones, providing a unique setting to observe deliberate policy responses. Using a dataset of 5108 housing transactions (2020–2025) and a two-stage least squares (2SLS) instrumental variable approach, we demonstrate that air pollution is a robust predictor of municipal tax rates. Our results reveal a “compensatory fiscal mechanism”: neighborhoods with higher industrial pollutants (SO2 and NOX) face significantly lower tax rates. Conversely, PM10 displays a positive association with tax rates, likely reflecting a centrality premium linked to urban density. We conclude that while municipal tax adjustments partially compensate residents for environmental burdens, they do not fully offset the market penalty associated with pollution exposure.