Paul L. Caron

Monday, October 21, 2019

Wong Presents The Financial Burden Of Property Taxes Today At UC-Berkeley

Francis Wong (Ph.D. Economics 2020, UC-Berkeley) presents The Financial Burden of Property Taxes at UC-Berkeley today as part of its Robert D. Burch Center for Tax Policy and Public Finance Seminar Series:


Financial hardship resulting from rising property tax burdens is a common complaint among homeowners, but very little evidence exists evaluating its quantitative importance. Standard frictionless models do not allow for financial strain generated by property taxation because under normal conditions liquid housing wealth sufficiently covers the cost of property taxes. This paper leverages a novel merge between property records, mortgage servicing data, and credit bureau data to demonstrate that relatively small increases in property taxes lead to increases in mortgage default and decreases in consumption. Event study estimates around the month in which homeowners' monthly property tax payments are increased to reflect their new property assessment imply that a $100 monthly tax increase leads to a 1% increase in mortgage delinquency and reduces auto consumption by $28. Moreover, homeowners generally do not draw on their home equity to pay property tax bills. These results contradict the predictions of standard models and imply the existence of important frictions in property taxation.

Estimates from a structural model confirm that the empirical results are inconsistent with standard consumption models. A behavioral model with inattentive homeowners fits the observed patterns. Responses to a novel survey of homeowners indicate that debt aversion plays a leading role in the apparent illiquidity of housing wealth.

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