The Impact of Property Taxation and Tax Limitations on Mortgage Distress: A Decomposition of Risk and Level Effects

97 Pages Posted: 24 Jan 2023 Last revised: 4 Jun 2024

See all articles by Sebastien Bradley

Sebastien Bradley

Drexel University

Da Huang

Northeastern University - D'Amore-McKim School of Business

Nathan Seegert

University of Utah - Department of Finance

Date Written: April 01, 2024

Abstract

Property tax limitations reduce the inherent pro-cyclicality of property taxes and expose households to greater risk of mortgage distress. We develop a novel measure of tax policy risk using an Arrow-Debreu framework to price property tax regimes' consumption smoothing features and obtain simulated measures of risk that capture all of the key characteristics of states' property tax systems. We simultaneously account for the effects of these policies-including all applicable tax limitations, effective tax rates, and reassessment frequency-on the overall level of taxation. Using a state-border discontinuity design and parcel-level data for residential properties across the continental U.S., we show that a one standard deviation increase in tax policy risk increases the probability of mortgage distress by nearly 30 percent. Variation in the level of taxation due to these same property tax policies is strongly negatively correlated with tax policy risk, and has a somewhat smaller effect on the probability of distress.

Keywords: Property Taxation, Tax Limitations, Risk, Distress, Mortgage Default, Foreclosure

JEL Classification: G21, G28, E44, K34, R20

Suggested Citation

Bradley, Sebastien and Huang, Da and Seegert, Nathan, The Impact of Property Taxation and Tax Limitations on Mortgage Distress: A Decomposition of Risk and Level Effects (April 01, 2024). Available at SSRN: https://ssrn.com/abstract=4332670 or http://dx.doi.org/10.2139/ssrn.4332670

Sebastien Bradley

Drexel University ( email )

1023 Gerri C. LeBow Hall
3220 Market St
Philadelphia, PA 19104
United States

Da Huang (Contact Author)

Northeastern University - D'Amore-McKim School of Business ( email )

Northeastern University
413B Hayden
Boston, MA 02215
United States

HOME PAGE: http://dahuang-finance.github.io

Nathan Seegert

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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