When do property taxes matter? Tax salience and heterogeneous policy effects

Abstract

Taxes create incentives; yet, the potency of these incentives may depend on the salience and household perception of the tax itself. We investigate this issue in the context of property taxes, exploring how accurately households perceive their property tax liabilities and what factors determine misperception. Leveraging a unique national dataset, created by linking Zillow's ZTRAX data to internal data from the American Community Survey, we first compare survey responses for how much households think they pay in property taxes to how much they actually pay based on municipal administrative records from ZTRAX. While homeowner tax perceptions are not substantially biased on average, we observe significant inaccuracy and systematic bias across different household(er) characteristics, institutional settings, and across states. Given that the vast majority of studies in the property tax capitalization literature use data concentrated in one state or locality, we also explore whether variation in tax misperceptions across states can help explain the heterogeneity in property tax effects on home prices. Results from a meta-analysis show that studies conducted in states with higher property tax misperceptions are significantly less likely to find property tax policy changes are fully capitalized into home prices.