Policy Research

Inattention to Deferred Increases in Tax Bases: How Michigan Homebuyers are paying for Assessment Limits

Sebastien Bradley

Summary

The article attempts to estimate the potential effects of property tax capitalization on houses in Ann Arbor, Michigan. The study points out that, due to a provision in Proposal A, property tax amounts are capped in their ability to increase, but uncap at the point of a change in ownership. Because of this provision, the study estimates that new homeowners are consistently over-paying for their homes because they do not factor in future tax burdens they will face when the property tax uncaps. Further, the study points out that information regarding taxes uncapping is not provided to prospective homeowners from realtors or mortgage lenders, and that these entities have no incentive to do so. The study also found evidence that when given information about future tax values homeowners significantly reduced the level of over-payment or possibly eliminated it completely. In 2005 a total of $30 million is estimated to have been collectively over payed in Ann Arbor alone, and the effect appears to be larger with lower income residents.

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Policy Implications

This article can be used in attempting to eliminate market distortions caused by current property tax policy. The study points out that there are currently no incentives for realtors or mortgage agents to provide information on property tax increases to prospective home buyers. This is estimated to create large over payments to home sellers and lead to market inefficiencies. By regulating the market and requiring certain levels of information to be provided to home buyers this effect can be largely mitigated, additionally increasing tax knowledge in public school systems could have similar effects.