Residential Occupancy and Property Tax Default

Household property tax default presents a considerable challenge to local governments aiming to provide public services at a sustainable level. The loss of revenue due to default is particularly acute in emerging markets and other communities with weak regulatory enforcement, and public policies aimed at reducing the incidence of property tax default have an important role to play in these communities. In this paper, we develop a dynamic framework of household property tax default in an environment with no regulatory enforcement and income-constrained households. Households pay their taxes as they benefit from the public goods provided, yet free-riding incentives and negative income shocks lead to property tax defaults as households aim to smooth consumption over time.We study the assumptions and the predictions of our theoretical framework empirically, using a large dataset of property tax payments of over 50,000 households in Ghana during the 2007-2016 time-period. The data allows us to differentiate among properties that are purely owner-occupied, purely tenant-occupied, and jointly occupied by owners and tenants. We find that, in support of our public good hypothesis, households positioned to benefit more from services rendered by public hospitals and suburban police stations are less likely to be in long-term default. Properties occupied by tenants are more likely to be in a long-term default compared to owner-occupied properties. Further, default rates increase after tax hikes yet the magnitude varies by occupancy types. In accordance with our theoretical prediction, the joint owner-tenant category comprises more income constrained households which, as we empirically observe, tend to be more often in short-term default. Thus, we find a statistically significant variation in property tax default rates among different home occupancy types. These empirical results conform to the predictions of our theoretical framework: in the absence of regulatory enforcement, property tax default is dependent on the household’s access to the public goods provided and its income constraints. The results bear useful insights for policy-making at the local level particularly in emerging markets where local governments struggle to guarantee continuity in the provision of public services.