Monday, January 07, 2013

Property Tax Visiblity Lowers Taxes?

Politicians have found a way to hide the pain of paying property taxes and avoiding tax revolts is to lower the rates. This way they can continue to get the taxes without having battle the electorate at the poles with referendums for lower taxes. Really?

The Hated Property Tax: Salience, Tax Rates and Tax Revolts
January 7, 2013
Source: Marika Cabral and Caroline Hoxby, "The Hated Property Tax: Salience, Tax Rates and Tax Revolts," November 2012.

The property tax is one of the most hated taxes in the United States. This is primarily because it is perhaps the most salient, or noticeable, tax. The high salience of the property tax helps explain its unpopularity, the level of the tax, and the prevalence of property tax revolts, say researchers Marika Cabral and Caroline Hoxby.
  • The tax is highly salient because in most cases property owners have to write a few checks a year to their local jurisdictions to pay for it.
  • However, in cities where the tax is very noticeable, the rates are often lower.
  • In most cases, the more visible the tax is, the more likely voters are to revolt against it through local or statewide referenda.
Because of its unpopularity, there has been a decline in the use of the property tax by state and local governments.
  • In 1970, property taxes comprised 3.3 percent of gross domestic product (GDP).
  • By 2000, they comprised only 2.5 percent of GDP.
  • In contrast, other taxes increased from 28.9 percent of GDP to 35.5 percent of GDP.
One study looked at the effect of reducing the saliency of the tax by exploiting conditionally random variation in tax escrow. Tax escrow is one method of paying property taxes that makes it much less visible to the public. Using this, the saliency of the tax was reduced, which enabled state and local politicians to increase it. However, this effect is limited because homeowners don't underestimate the taxes they pay but are simply less likely to revolt.

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