In Countercyclical Property Taxes, Andrew Hayashi argues that residential real property taxes have important—and counterintuitive—macroeconomic implications during recessions and subsequent recoveries. Although policymakers often tout property taxes as stable revenue sources when the economy stalls, Hayashi lucidly outlines how these tax instruments amplify both household risk and community risk by pressuring homeowners’ discretionary spending. As Hayashi highlights, the design features of property taxes that generate revenue stability are the very same elements that shift risk from government units to households and communities. For this reason, Hayashi suggests taking a fresh and more nuanced look at property tax relief during downturns, with an eye towards fairness and equity in addition to revenue.
The mechanics of property tax assessment and collection loom large in Hayashi’s analysis. Specifically, Hayashi takes advantage of staged assessment regimes, in which localities revalue real property on a periodic schedule rather than annually, to show “temporal decoupling” between the assessed and true value of real property in a declining market. That is, as real housing prices fall, the corresponding values on tax rolls (and the potential tax bill) stay the same, unless the property is scheduled for reassessment in that year. Hayashi uses this wedge to show quantitatively that households stuck with inflated valuations suffer greater financial stress by a number of metrics—and this stress may have spillover effects, slowing local recoveries by depressing consumption within the community. Indeed, Hayashi makes a strong case that these spillover effects are greater for homeowners, which implies—in a way that modestly offends my distributional sensibilities—that policymakers should target relief to this group instead of, say, renters. There is some irony in localities shifting short-term pain onto their least-mobile members in exchange for the doldrums of a protracted return to prosperity.
For me, Hayashi’s data and conclusions raise the question of why homeowners continue to pay (or prioritize paying) property taxes during economic crisis, especially if a little self-directed tax relief might benefit both sides in the long run. One answer presumably stems from the fact that many homes are subject to mortgage debt. Nonpayment of property taxes almost certainly constitutes a default under these loans, and, more critically, lenders typically secure satisfaction of these taxes by bunding additional prorated amounts into monthly mortgage payments. As Hayashi notes, these escrow arrangements essentially accelerate the economic costs and benefits to households of in-arrears property taxes. These arrangements, however, also limit self-help as a vehicle for property tax relief, especially in the absence of broader federal interventions in the home mortgage market.
Alternatively, homeowners might worry about interest, penalties, and liens, as well as their reputations within the community—all bad things that flow from scofflaw behavior. My guess is that, at least over the short-term, the monetary and legal penalties for delayed tax payments generate more psychic stress than corporeal loss. Effective interest rates on delinquent property taxes, even after liens attach, are likely lower than rates for credit cards and other revolving debt, as well as pernicious financial products such as tax refund anticipation loans. And foreclosure can move slowly, even for tax liens held by third parties. Finally, the federal government could simply buy and hold tax liens, which would infuse localities with cash and give some breathing space for homeowners who can’t pay their property taxes. In light of Hayashi’s compelling arguments, my sense is that we can fry bigger fish than multiyear assessment cycles when addressing the role of property taxes in combatting economic downturns.
Finally, Hayashi’s article is particularly timely in light of the COVID-19 pandemic, which emphasizes the paramount and immediate importance of liquidity—at every level—in a crisis. Given the apparent political, structural, and administrative hurdles to pumping cash into folks’ pockets, policymakers ought to consider leveraging unorthodox mechanisms to manage the economy. From this perspective, property taxes offer a lot of promise, and Hayashi’s work should spur some foundational rethinking of this relatively staid and sleepy instrument.
Overall, Hayashi’s insightful and tightly argued article is a critical intervention in the literature on law and macroeconomics, as well as scholarly conversations about taxation and crises. Academics as well as policymakers should find Hayashi’s analysis to be required reading in thinking through our current crisis as well as potential future crises.