Taxing Homeowners Who Won't Borrow

Taxes on land and property have long been viewed as highly efficient, but standard theories assume homeowners are willing and able to borrow against their housing wealth. Using linked administrative data and quasi-experimental variation in property taxes, I show that because households do not borrow, property taxes exacerbate consumption volatility and financial distress. Moreover, property taxes increase foreclosures and decrease home investment, implying negative externalities as well as distortions to the tax base. Even homeowners that are not financially constrained reduce consumption and borrowing, implying that these responses are not a result of credit constraints. Instead, a household survey indicates that preference-based debt aversion deters borrowing. Together, these findings signify that property taxes entail substantial economic costs that are unmodeled in canonical theories.