UC Berkeley

Since the 19th century, economists have viewed taxes on immobile wealth in the form of land and property taxes as special and preferable to all other forms of taxation. Today, US property taxes provide one-third of state and local government tax revenue. They also directly fund many popular benefits such as public schools. Despite the popularity of these benefits, property taxes are America's most despised tax. Starting with California's 1978 tax revolt and passage of Proposition 13, 46 states have limited the ability of local governments to tax property.

This dissertation contributes to the fields of public economics and household finance by providing empirical and theoretical evidence about how property taxes impact the finances of taxpayers. This contribution is particularly important given the widespread financial fragility experienced by American households. I provide three complementary sources of evidence. In the first chapter, I leverage a novel dataset of merged credit bureau, mortgage servicing, and property assessment records to examine homeowner responses to tax increases. In the second chapter, I conduct a survey of US homeowners to evaluate self-reported responses to and attitudes towards property taxes. In the third chapter, I calibrate a structural model of homeowner responses to property taxes.

The first chapter uses an event study methodology applied to administrative data to examine homeowner responses around the month that property taxes increase. I find that a $50 increase in monthly tax payments generates a 9% increase in mortgage delinquency and a reduction in auto consumption with a marginal propensity to consume of 0.15 after one year. Homeowners do not draw on their housing wealth to pay their property taxes. A surprising finding is that homeowners with high credit scores and large amounts of housing wealth exhibit the largest consumption responses. This indicates that the financial burden of property taxes cannot occur solely through financial constraints. This motivates alternative methods (e.g. direct surveys and structural modeling) to better understand the nature of these non-financial constraints.

The second chapter attempts to answer the question, why don't homeowners draw on their housing wealth in response to property tax increases? This question is important because even if property tax increases were not accompanied by increases in housing wealth, homeowners should want to avoid delinquency. I conduct an online survey of 3,000 US homeowners to directly elicit answers to this question. 77% of respondents say that they would not consider taking out a second mortgage even if they had difficulty paying property taxes. Two-thirds of those would not do so because they feel uncomfortable being in debt. Moreover, most respondents would not take up a zero-interest loan to pay their property taxes. Preference-based debt aversion appears to be the key reason why homeowners do not draw on their housing wealth to pay their property taxes.

The third chapter demonstrates that a combination of debt aversion, behavioral inattention, and impatience is necessary to match observed behavior in a calibrated structural model. A standard frictionless model cannot account for the consumption and mortgage delinquency responses. The inadequate fit implies the presence of behavioral inattention and impatience in homeowner preferences. Incorporating preference-based debt aversion helps explain why homeowners are sufficiently impatient to miss mortgage payments but nonetheless do not rapidly draw down their housing wealth in order to finance current consumption.

Together, these findings imply that debt aversion allows property taxes to create financial distress, inhibiting the efficiency of pure property taxes. Financial distress also reduces public support for property taxes and motivates to policies designed to limit them. Distortionary tax relief appears to be necessary in order to ensure the political sustainability of property taxes.