Homeowners, Renters and the Political Economy of Property Taxation

Many economists have cited fiscal illusion as an argument against specific types of taxes arguing that less visible taxes may cause voters to systematically underestimate the true burden of taxation. The higher willingness of renters to support an increase in the property tax, often referred to as renter illusion, is often used as one of the classic examples of fiscal illusion. In this paper we use detailed micro-level survey data of registered voters in California to provide new evidence on the renter illusion hypothesis. The survey data contains voter responses to two key questions: 1) their willingness to pay higher property taxes to expand funding for public services and 2) their willingness to pay higher sales taxes to fund those services. Using a difference-in-differences estimation strategy to control for individual specific preferences for public service spending, we find first that renters are approximately 10 to 15 percentage points more likely than homeowners to favor a property tax increase over a sales tax increase to fund public services. However, further analysis indicates that our results are not driven by the voting behavior of renters. Results based solely on the sample of renters indicate that renters are indifferent between a property tax increase and a sales tax increase. In contrast, homeowners strongly oppose a property tax increase relative to a sales tax increase. These results cast doubt on the strong version of the renter illusion hypothesis that suggests renters believe they do not pay the property tax. Further analysis reveals that the strong opposition among homeowners to the property tax is not associated with the relative tax burden faced by homeowners. Examining the variation in tax burden created by Proposition 13 in California, we find that homeowner aversion to the property tax does not increase with the homeowner’s relative tax burden. These findings of homeowner aversion to property taxes are consistent with recent work suggesting that salience matters when voters evaluate taxes, but also suggest that increased salience does not necessarily lead to more careful consideration of individual tax burdens.