Unanticipated Property Tax Shocks, Tax Delinquency, and the Role of Conventional Mortgages

• In Event: In Honor of Ronald C. Fisher and His Landmark Text on State and Local Public Finance: Property Value Assessment

Abstract

Unanticipated shocks to household finances are cited as a primary source of default and we investigate one source of shock on a homeowners default decision: the effect of unanticipated increases in their property tax. Utilizing a Michigan constitutional mechanism that generates property tax increases that may be unexpected from the consumers’ viewpoint, we examine the “pop-up” effect from taxable value capped properties that occur when property is purchased from long-time homeowners. Our estimates show a 2.5 percentage point increase for each additional 1\% increase in tax bill differences between old and new property owners. In addition, the ability to anticipate or shield oneself from the shock varies across individuals. We examine how effects differ between those purchasing a home with a conventional mortgage versus those who purchase property with cash. Our results show those paying with cash have a larger effect, increasing to 3.3 percentage points, while those with a mortgage are unaffected. This latter examination is of particular interest because it highlights how the “shock” of a tax bill affects delinquency versus being shielded from large bills through escrow accounts. Our conclusions provide evidence that additional protections should be considered to those without conventional mortgages and we offer policy solutions to this problem.

Authors

• Fernanda Alfaro, Universidad Católica del Norte

• Timothy Hodge, Oakland University