Mad as Hell: Property Taxes and Financial Distress

Property taxes are the canonically efficient tax, yet they are especially unpopular and have been curtailed in 46 states. Property taxes may create financial distress when rising home values raise property tax bills but not incomes. In administrative data, I find that even modest tax hikes create distress. Why don't homeowners draw on their housing wealth in response to property tax increases? Even if property tax increases were not accompanied by increases in housing wealth, homeowners should want to avoid delinquency. Standard economic reasoning suggests that financial frictions (e.g. transaction costs, limited credit supply, or information frictions) may prevent homeowners from borrowing against their housing wealth. However, it is difficult to rationalize the large consumption responses exhibited by financially unconstrained homeowners with these frictions alone. An alternative hypothesis is that homeowners may have a preference for avoiding additional indebtedness (i.e. debt aversion). I conduct a novel online survey of 3,000 US homeowners in order to test this hypothesis. 77% of respondents say that they would not consider taking out a second mortgage even if they had difficulty paying property taxes. The majority (67%) would not do so because they feel uncomfortable being in debt. A minority of respondents name transaction costs (33%), credit supply (12%), or a lack of knowledge (4%) as reasons for not taking out a second mortgage. These responses indicate that preference-based debt aversion is the key reason why homeowners do not draw on their housing wealth to pay their property taxes.

Debt aversion also prevents homeowners from taking up a zero-interest loan to pay their property taxes. Property tax deferrals are a common form of tax relief which allow homeowners to postpone paying property taxes (with interest) until they eventually transact their property. These policies are theoretically appealing because they allow homeowners to avoid becoming liquidity constrained without creating substantial economic inefficiencies. In my survey, 42% of respondents say that they would never defer their property taxes, even at zero interest. 61% of those who would never defer say that they would not want to feel like they were in debt, indicating that debt aversion is a key deterrent to the effectiveness of tax deferrals. These results help explain the lack of success of property tax deferral policies in the US. Thirty-one states offer taxpayers some form of property tax deferral; however, even in places where eligibility criteria are broad, take-up of property tax deferrals tends to be very low.

I use the survey of homeowners to explore policies that can make property taxes less unpopular and find that aligning property taxes with homeowner incomes substantially improves attitudes towards property taxes. I conduct a randomized information treatment that informs respondents in Michigan about their state's income-based tax relief program. This policy lowers property taxes for over one million taxpayers. Receiving randomized information about this policy reduces the probability that a respondent identifies the property tax as the worst tax by 7 percentage points (a 24 percent reduction). This finding supports the idea that financial distress among illiquid homeowners generates animus towards property taxes. If this reduction were applied to nationwide attitudes, the property tax would no longer be the most unpopular tax.

The causal links between property taxes, financial distress, and property tax animus help to explain the historical unpopularity of property taxes. I show that enactments of statewide property tax limits are concentrated in periods of rapid local house price growth. These are precisely the circumstances under which illiquid homeowners would have experienced financial distress due to the misalignment of property taxes and income flows. Moreover, survey data indicate that property tax animus is concentrated in counties in which rapid house price growth led to higher property tax burdens, but not in similar counties where local tax policies prevented house price growth from increasing property taxes.