Property Tax Salience and Payment Delinquency

Despite only modest supporting evidence, shocks to households ’ personal finances are com-monly cited as one of the principal causes of homeowner defaults. In this paper, I investi-gate the extent to which different component sources of annual variation in property tax obligations influence the probability and magnitude of property tax delinquency—a likely precursor to mortgage default. Under Michigan’s system of property tax limitations, ratio-nal homeowners should readily anticipate changes in tax liability, making such changes an unlikely cause of delinquency, regardless of the underlying source. Looking at tax payment records for the city of Ann Arbor, Michigan for the period 2006-2009, I instead find that the probability and severity of delinquency along several dimensions are generally decreas-ing in the degree of salience of those tax features having given rise to increases in property tax obligations, though the precise importance of these relative effects differs considerably according to whether or not households are subject to tax escrow. Overall, this suggests that homeowners, especially new homebuyers, do not rationally anticipate their future tax bills. Optimization errors resulting from households ’ limited attention with respect to the property tax system are thus associated with small, yet non-trivial, income effects and are almost certainly underestimated. ∗Contact