The Michigan property tax system gives rise to wide variation in taxable basis across comparable homes due to the application of acquisition-value based assessment limits. Exploiting the fact that the resulting differences in property tax liability are temporarily inherited by new homebuyers, I estimate the degree of capitalization of these largely-idiosyncratic tax differences in a setting free of many of the econometric problems that typically plague estimation of property tax capitalization in order to evaluate whether homebuyers understand the tax implications of their home purchases. Consistent with anecdotal evidence, I find that homebuyers are woefully inattentive to the temporary nature of their initial tax obligations. Temporary tax savings accruing to the purchasers of homes subject to relatively low tax obligations at the time of sale are significantly overcapitalized, as if such reduced obligations would persist indefinitely. For the main period under consideration (1997-2007), this implies an overpayment of roughly $10,000 for the average home--a stark departure from the traditional view of well-informed, rational consumer behavior.
- tax salience,
- limited attention,
- property tax capitalization,
- assessment limits
Available at: http://works.bepress.com/sebastien_bradley/1/