David R. Henderson  

The More-Visible Are Property Taxes, the Lower they Are

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People hate the property tax more than other taxes. There are fairly regular "tax revolts" against the property tax, many of which are based on local or statewide referenda. Property tax limits, whether imposed by referenda or by state legislatures, often remain binding for a number of years--even decades. In contrast, successful revolts against other taxes, such as the income, sales, or corporate tax, are rare and often temporary. Although limits on other taxes are often considered and occasionally enacted, it appears that the public rarely has the will to insist upon their literal enforcement. In part because of tax revolts, tax limits, and general antipathy towards the property tax, property tax revenue has declined greatly as a share of all taxes collected in the U.S. It has also declined as a share of U.S. GDP.
So begins a recent NBER publication, "The Hated Property Tax: Salience, Tax Rates, and Tax Revolts," NBER Working Paper No. 18514 by Marika Cabral and Caroline Hoxby. [Ungated version here.]

Cabral and Hoxby find that when property taxes are less salient, people tend to be less aware of the amount they pay and when people are less aware, property tax rates tend to be higher.

How do they get variation in salience? By looking at the percentage of people who pay their property taxes with tax escrow, that is, bundled with their mortgage payments. Check out their Figure 7 (page 55 in the ungated version) for a striking graph. The standard deviation of the difference between the property tax reported in surveys and actual tax paid was $2215 for people who used tax escrow and only $781 for people who did not.

Their bottom line on the effect of salience on property tax rates:

A standard deviation increase in tax escrow among mortgage holders generates a 0.46 mil increase in the property tax rate. A standard deviation increase in tax escrow among all owners or among all households generates about a 0.43 increase in the tax rate. These are not inconsiderable tax rate increases when we recall that there is only a difference of 1.1 mils between the 10th percentile tax rate and the average tax rate.

They also find on an effect on so-called property tax revolts, namely, measures, often undertaken first by citizens' groups, to limit property taxes, Prop. 13 in 1978 in California being the most famous. Specifically:
The estimates indicate that an increase of one standard deviation in the tax escrow percentage generates a decrease of 0.93 to 1.24 in the number of limits in force. (The effect varies with whether the tax escrow percentage is measured among mortgage holders, home owners, or all households.) In other words, when tax escrow in a state rises by a standard deviation (suggesting that property tax salience falls), a state's voters support about 1 fewer limits. The mean number of limits in the regression is 2.3 with a standard deviation of 1.2. Thus, the decrease in the enactment of limits is considerable.

This has obvious implications for other taxes. One of the most hated taxes in Canada, for example, is their highly visible GST, a tax on goods and services that began at 7% in 1991 and has now fallen to 5%, precisely because it is hated. And of the least visible taxes is the income tax, which, because of withholding, is not known well to most people.

Isn't it interesting that shortly after this tax was introduced in Canada, there began the push by the Liberal government to rein in federal spending? I wrote about it here. Yes, it's true, as some of my Canadian cognoscenti friends have pointed out to me off-line, that there were key bureaucrats in Canada's Finance Department that pushed for these cuts. That's a fact to which I didn't give adequate attention. But it's quite conceivable that Canadians did not resist the cuts and even themselves pushed for them because of the newly-visible cost of government. And Canadian politicians listen to Canadian voters as well as to Canadian bureaucrats.

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COMMENTS (13 to date)
Ken B writes:

The GST was passed specifically to be visible (and hated). It was even illegal to post only a tax-included price, you had to show the tax explicitly.

(Now called HST not GST tachnically.)

David R. Henderson writes:

@Ken B,
Thanks. Does "H" stand for hated? :-)

wintercow20 writes:

Seems like a great opportunity for behavioral economists to demonstrate that their motivation is really "just" a way to help us all make better decisions and to get more of what we want. Should they not be pushing for an ending of mandatory witholding, and government rules regarding transparency much like they push for in lending disclosures?

Imagine a rule requiring the county and state to send confirmation of how much in sales taxes you paid this year.

Imagine a rule requiring the state and feds to report in large print on a single page how much in income and payroll tax you paid each year, and what share of it was sent to which programs.

This should get bipartisan approval, right? After all, no one here is proposing a tax increase or decrease. Just truth in advertising, that's all.

David R. Henderson writes:

What a great insight! Next time I talk to my former U. of R. colleague, Richard Thaler, I'll propose it to him. He's actually more open to this kind of thing than you might think.

Ken B writes:

'Henderson' actually. You should hear the cursing! "Hendersonofa .."

OK, OK I jest. It stands for 'Harmonized' as it was changed as part of a process to make it and provincial sales taxes more aligned.

David R. Henderson writes:

@Ken B,
Maybe "Hendersonized." :-)
Now that you mention it, that rings a bell. My neighbors (this program won't even let me spell that word the "right" way :-)) at my cottage last summer explained it to me. I thought they had said that it wasn't harmonized yet in some provinces. Is it?

Ken B writes:

David, I grew up in Ontario, so you should know what my answer will be. What other provinces?

I don't know actually, likely. Harmonizing Canadians is like hearding cats.

Floccina writes:

I pay about $1,000 in property taxes on an apartment that I own. I rent out the apartment for $500/month. It is in a very competitive market so I think that the incidence of the tax falls on the renter and so I do not worry much about it for myself but the renters who I think pay it have no idea that they are paying any of it. Tax incidence should be taught somewhere (perhaps this blog)!

Also how about matching FICA!?

Much of the art of politics is to find the tax and show the benefit.

MingoV writes:

I doubt that property tax is the most hated tax. It gets the most opposition because it is local and because a few outspoken people can rally enough support to reduce it. That doesn't make it the most hated.

Personally, the non-federal* taxes I hate most are local and state purchase taxes (usually mislabeled as sales taxes). I lived near Memphis, Tennessee where those taxes were 9.25%.

*My most hated federal tax is Social Security and the horrid Ponzi scheme the tax dollars support.

David R. Henderson writes:

I doubt that property tax is the most hated tax.
Really? Even despite their Figure 3?

8 writes:

Pass a law that states all withholding, plus employer shares of payroll taxes, is paid into a bank account in the name of the employee. On April 15, they must pay their taxes out of this account. People earning $30,000 will wonder why they are writing a monster check to the IRS.

Another one would be to require companies to put the cost of health insurance and payroll taxes on paychecks so employees could see the full cost.

Brian writes:

See it is studies like this conservative and libertarians statesmen should read and understand.

If conservatives/ libertarians would play the long game and sometimes violate some of their less regulation tendency in order to make tax more visible through regulations, and force tax payers to go though the act of actually writing a check for taxes. We would get more people to move to our position than billions of dollars a year of effective subject specific advertising.
This is one of the very few area I am for a lot more regulations at the federal level, tax visibility. I think this would over the long term put more downward pressure on government size than any other single messure/agurment.

Hopaulius writes:

Two points: I hate that the property tax is putatively on the market value of the property rather than on the equity of the property "owner." If my property is assessed at $150k but I owe $200k, I still pay tax on the $150k that is really a minus $50k in terms of equity. Moreover, assessors notoriously raise assessments in boom times but leave them high in bust times.

Second, surely the most invisible taxes are federal and state vehicle fuel taxes, which appear on no receipt. You'll see the sales tax for the box of tissues you buy in the mini mart, but nothing for the $50 you spend in gasoline. Moreover, when AAA announces average gasoline costs, even they don't attribute any of the variability between states to differing tax rates.

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