Removal of renter's illusion: Property tax compliance among renters and owner-occupiers

Several countries provide tax benefits that favor owner-occupiers over renters. The objective of the current study is to examine a potential justification of this policy. We compare the propensity to pay local property tax among owner-occupiers and renters. The Israeli setting provides a unique example for the removal of "renter's illusion". Unlike other countries, municipal property tax charge is registered and paid directly by renters. Consequently, this methodology provides a tractable measure for the degree of financial compliance in renter-occupied units. Micro-level panel data collected from the Jerusalem municipality covering 2012-2014, demonstrate that compared with free-market renters, owner-occupiers without partial exemptions paid 11.95% more of the current local property tax charge, a statistically significant difference. This gap remains robust even after adjustment to the same level of income, age, number of children, location (West vs. East Jerusalem), and the same annual lagged percentage of paid charge. Moreover, the highest gap of 10.63% is found among 20-year-old tenants. Finally, the estimated increase in tax collection associated with tenure mode shift is 0.01-0.77% of the total anticipated collections in 2015. Research findings thus demonstrate the utility of programs designed to motivate renters to become owner-occupiers, particularly among the youngest households without children.