Property tax delinquency and its spillover effects on nearby properties

In this paper, I review and assess what we have learned about what motivates individuals to pay -or to not pay -their legally due tax liabilities. I focus on three specific questions. First, what does theory say about what motivates tax compliance? Second, what does the evidence show? Third, how can government use these insights to improve compliance? I conclude with some suggestionsand some predictions -for future research. 356 ALM measure of the individual's constant relative risk aversion. Using the definitions of I C and I N in equations (1) and (2), the expected utility maximization generated by the solution to equation (3) can be solved for the optimum amount of reported income R*. 9 Now suppose that R* is calculated for specific, realistic values of the various parameters. For example, if t = 0.4, f = 2, p = 0.02 and e = 1, then the individual will optimally report no income. Very large values for relative risk aversion are required to generate compliance consistent with actual country experience. When e = 3, reported income is only 14% of true income; when e = 5, it is still only 44%; when e = 10, it is 71%; and e must exceed 30 for compliance to exceed 90%. Even if the probability of detection is as (unrealistically) high as 30% (with t = 0.4 and f = 2), relative risk aversion must exceed 7 to generate compliance over 90%. However, existing field evidence on the coefficient of relative risk aversion using a variety of approaches suggests that e ranges between 1 and 2, and may even be as low as 0 (Friend and Blume, 1975;Hansen and Singleton, 1983;Hall, 1988;Chetty, 2006;Gandelman and Hernandez-Murillo, 2013). Risk aversion must be abnormally large for behaviour to be even roughly comparable to actual observed choices, even in many developing countries with low levels of compliance.Admittedly, there are reasons why this simplistic analysis somewhat overstates the problem with the standard expected utility approach. 10 Consider the United States as an example. First, a standard feature of many individual income tax systems is that a third party (e.g. the individual's employer) reports the relevant part of an individual's taxable income to the tax authority (and often also withholds income taxes on this reported taxable income). This third-party information increases significantly the chances that an individual who underreports income on a filed return will be detected, especially in its combination with employer source-withholding. 11 Second, the 'official' IRS audit rate somewhat understates 'actual' IRS audit policy. In fact, the IRS conducts a range of audits, and for many types of audits, the actual rates are quite high. Third and relatedly, while overall audit rates are quite low, among certain income and occupation classes, they are more frequent. Fourth, the IRS conducts a wide range of audit-type activities, including line matching and requests for information, and these activities are much more frequent. 12 Finally, it is individual perceptions of audit rates that influence behaviour, rather than...

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“…There is some recent work on property tax delinquency (e.g. Alm et al ., , ). The literature on property tax fraud is more anecdotal.…”

Section: Type Of Income Net Misreporting Percentage (%) Percentage Ofmentioning

confidence: 97%

What Motivates Tax Compliance?

Alm

2018

Journal of Economic Surveys

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271

223

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“…This is equivalent to a $6,600 discount on the sale of the average home in their data. Alm et al (2016) also found the influence of foreclosed properties within the Census block of a property sale to be much larger than tax delinquency: approximately, a 20% decrease in the sale price for every 1% increase in the foreclosure rate. 2 Whitaker and Fitzpatrick (2013) examined the interactive effect of tax delinquency, foreclosure, and property vacancy in Cleveland for property sales in 2010 and 2011.…”

Section: Previous Research On Distressed Propertiesmentioning

confidence: 95%

“…However, along with Alm et al (2016) and Whitaker and Fitzpatrick (2013), we believe that neighborhood decline and depressed market values of homes can occur separate from the foreclosure process. No less important, but significantly less studied, is the influence of property tax delinquent properties.…”

Section: Introductionmentioning

confidence: 93%

“…However, property tax delinquency is not the main focus of these two studies. Examining Chicago, Alm et al (2016) found an additional tax delinquent property with a tax lien (sold or unsold) within the Census block of a property sale to be associated with a 2.7% to 2.8% decrease in the sale price. This is equivalent to a $6,600 discount on the sale of the average home in their data.…”

Section: Previous Research On Distressed Propertiesmentioning

confidence: 99%

“…There is a significant gap in the literature regarding these types of properties and their impact on housing values. Currently, we know of only two other studies that examined this correlation (Alm et al 2016;Whitaker and Fitzpatrick 2013).…”

Section: Introductionmentioning

confidence: 99%

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Assessing the Influence of Property Tax Delinquency and Foreclosures on Residential Property Sales

Carroll

Goodman

2016

Urban Affairs Review

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We examine the influence of property tax delinquency on the sale price of nearby homes from 2002 to 2013 using more than 46,000 residential property sales in a representative midwestern central city—Milwaukee, Wisconsin. After controlling for a number of property and neighborhood characteristics including nearby foreclosures, we find property tax delinquency has a significant influence on nearby home sales. The relationship is negative; one additional tax delinquent property within 250 m of a home sale is associated with a discounted sale price of 0.79% or approximately $1,085 on average. In addition, the influence of tax delinquent properties on home sale prices diminishes with distance, suggesting blight is the source of the discount. Based on these findings, the negative influence of tax delinquency is likely to be exacerbated in central cities where housing density is greater and delinquency is higher and more persistent than the surrounding suburbs, which has the potential to lead to fiscal distress as property taxes are the primary revenue source for cities. As such, we suggest a two-tiered approach for cities to mitigate the negative consequences of tax delinquency: a combination of policies to eliminate delinquency and also to help homeowners become financially stable.

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Assessment frequency and equity of the property tax: Latest evidence from Philadelphia

Hou,

Ding,

Schwegman

et al. 2023

J Policy Anal Manage

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Philadelphia's Actual Valuation Initiative adopted in 2013 creates a unique opportunity for us to test whether improved reassessments at short intervals to true market value improve property tax equity. Based on a difference‐in‐differences framework using parcel‐level data matched with transactions in Philadelphia and 15 comparable cities, this study finds positive evidence on equity outcomes from more regular reassessments. The quality of property assessment improves substantially after 2014, although the extent of improvement varies across communities. Cross‐city comparisons confirm Philadelphia's improvement in the quality and equity of property assessments after adopting the initiative. These results highlight the importance of regular reassessment in places where property values increase quickly, and they shed light on the disparate impacts of reassessment across property value and across neighborhood income, race, and gentrification status. The paper makes the case that the property tax, if designed well, can be an equitable tax instrument.

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Property tax delinquency and its spillover effects on nearby properties

Cited by 9 publications

References 24 publications

What Motivates Tax Compliance?

What Motivates Tax Compliance?

Assessing the Influence of Property Tax Delinquency and Foreclosures on Residential Property Sales

Assessment frequency and equity of the property tax: Latest evidence from Philadelphia

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