Homeowner Effect and Strategic Interaction in Local Property Taxation

This paper investigates whether and how strongly the share of households owning their homes in a community affects residential property taxation by local governments. Homeowners bear full property tax burdens irrespective of local market conditions, and the tax is more salient to them. “Home owner communities” may hence oppose high property taxes in local elections in order to protect their housing wealth. Using granular spatial data from a complete housing inventory in the 2011 German Census and war-related housing damages as a source of exogenous variation in local homeownership, we provide empirical evidence confirming that otherwise identical jurisdictions choose significantly lower property tax multipliers when the share of homeowners in their population is higher. This result appears to be independent of local housing market conditions, which suggests tax salience as the key mechanism for this effect. We find strong positive spatial dependence in tax multipliers, indicative of property tax mimicking by local governments