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An Experimental Evaluation of Strategies to Increase Property Tax Compliance: Free-Riding in the City of Brotherly Love


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Tax Policy Conference

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An Experimental Evaluation of Strategies to Increase Property Tax Compliance: Free-Riding in the City of Brotherly Love

  1. 1. An Experimental Evaluation of Strategies to Increase Property Tax Compliance: Free-Riding in the City of Brotherly Love Michael Chirico, Robert Inman, Charles Loeffler, John MacDonald, and Holger Sieg University of Pennsylvania September 21, 2015
  2. 2. Tax Compliance The lack of tax compliance has become a policy issue of central importance to all levels of government in developed and developing economies. In 2009, the developed economies of the OECD reported an average tax non-compliance rate of 14.2. The rates range from a low of 2-3 percent in Austria, Denmark, Germany, Korea, and Norway to 25 percent or more in Belgium, Iceland, Portugal, the Slovak Republic, to a high of 73 percent in Greece.
  3. 3. Why is Noncompliance a Significant Concern? 1. Governments are denied the revenues needed to provide basic public services essential for ensuring the safety, health, and minimal well-being of all citizens. 2. If there is significant non-compliance and basic services are to be provided, then tax rates will need to rise on those who pay taxes. 3. Non-compliance undermines the principle that everyone has to pay their “fair share” of taxes.
  4. 4. What do I owe? Taxpayers have the ability to influence what is owed on any tax that requires self-reporting of income or assets, such as self-reported consulting or business income. The need for self-reporting is reduced as the formal economy and the use of audited business records expands. Taxes which can take advantage of those records maximize tax compliance and are preferred for just this reason. Examples are the value added tax and the property tax.
  5. 5. What happens if I don’t pay? The taxing jurisdiction can also control compliance by influencing the decision to evade, once the tax liability has been assessed. The most common strategy is the economic stick - fines and penalties. Liens and sheriff sales are more extreme and costly measures to enforce property tax compliance. The empirical evidence regarding the effectiveness of economic sanctions to impact aggregate collections is mixed.
  6. 6. Are there Alternatives to Fines and Penalties? Researchers have turned attention to stressing other motivations for increasing tax compliance. Such motives are grounded in the value taxpayers place in helping to achieve positive outcomes such as the provision of public services. Individuals may also derive satisfaction from knowing, or from having others know, that they have done their civic duty. Researchers have started to explore the effectiveness of softer, nudge approaches to reinforce these motivations.
  7. 7. Our Agenda Our agenda here is to extend our understanding of tax compliance to include the payment of local property taxation. In the fall of 2014, we assisted the City of Philadelphia’s Department of Revenue in designing an experiment to evaluate potential nudge strategies to improve local property tax collection. The City’s historical performance in tax compliance has not been good, collecting only 90 percent of assessed property tax revenues compared to an average compliance rate among large U.S. cities of nearly 95 percent. (See Table 1.) We conducted a controlled experiment redrafting letters reminding taxpayers that their 2014 property tax payments were overdue.
  8. 8. Standard Letter Figure 1: Standard Due Letter PO BOX 148 PHILA PA 19105-0148 I...III.I ........ II..II....IIII...I RICHARD ROE 5107 DUNLAP ST PHILADELPHIA PA 19131 CITY OF PHILADELPHIA DEPARTMENT OF REVENUE AUGUST 12, 2014 TEMP: 000359764 NOTICE SfllAllHlMOflia Phone: (215) 686-6442 Property: 5707 DUNLAP ST REAL ESTATE TAX BILL Includes payments posted through AUGUST 07, 2014 This bill represents the real estate tax liabilities for this account You must pay these liabilities immediately. Interest, penalty, and/or additions have been calculated to the due date. Additional amounts will accrue after that date. Only payment in full or a payment agreement will prevent enforcement action. THIS BILL MAY NOT REPRESENT YOUR TOTAL TAX LIABILITY BRT Number Period Tax Due Balance Additions/ Interest Penalty Charges Total Amount Due 023459700 2014 755.76 68.02 0.00 0.00 823.78 Total 755.76 68.02 0.00 0.00 823.78 ----------------- DETACH HERE ---------------------------- RETURN THIS PORTION WITH PAYMENT PAYMENT DUE: $823.78 ON OR BEFORE SEPTEMBER 06, 2014 AMOUNT ENCLOSED: MAKE CHECKS PAYABLE TO: CITY OF PHILADELPHIA NOTICE #: 5518914149812 RICHARD ROE TEMP: 000359764 DEPARTMENT OF REVENUE P.O. BOX 148 PHILA, PA 19105-0148 l.,.lll.l„,..(lll....l.l.ll..................II.I..II..I....I 3 3 3 b l l 2 3 1 T T Q 0 D D 5 f l l f l T l M 1 4 0 f l l 2 0 0 0 0 0 0 0 D 0 0 D 0 0 0 D 0 0 0 D D 0 0 0 0 D 0 0 D 0 0 D l T f i l ] i 0 5 0 0
  9. 9. Our Notification Strategies We proposed three additional formats for DoR’s reminder letter. (See the appendix of the paper.) In addition to the listing of tax payments, interest, and penalties, the alternative letters contained a sentence that either 1. threatened the potential loss of the taxpayer’s home or property if taxes were not paid, or 2. appealed to the positive community benefits in provided public services that the taxpayer’s dollars provide, or 3. appealed to the positive benefits of fulfilling your civic duty to yourself and others by paying your taxes. For legal reasons we were not allowed to modify the reminder letter directly. Hence, we used a second letter that was added to the standard letter in the mailing cycles.
  10. 10. Our Experimental Design Our approach to randomization was constrained by the logistics of DoR’s enforcement faculties. We concluded after several discussions with our collaborators at DoR that it would be logistically impossible to assign properties at random to different treatments. Instead, we chose to exploit the pseudo-random assignment of properties to billing cycles and randomized treatments across these cycles. We conducted a variety of balance checks to make sure that this as pseudo-random assignment of properties to billing cycles was effective. (See Table 3 for details.)
  11. 11. Descriptive Statistics of Our Sample Full Sample Analysis Sample Number Observations 134887 4927 Amount Due 4409 3465 Assessed Property Value 138867 186691 Value of Tax 1586 2405 Length of Debt 6 4 % Residential 80 80 % w/ Philadelphia Mailing Address 88 83 % Owner-Occupied 24 22 Differences between the full sample and our analysis sample are largely due to the fact that 2/3 of tax payers are assigned to collection agencies in September of each year.
  12. 12. Effectiveness of Treatments Group Treated Number Total Taxes Percent Days Treated Owed Ever Paid Threat 1 499 $1,839,826 14 Service 4 2,211 $8,003,148 15 Civic Duty 2 1,142 $3,794,900 18 Control 2 1,075 $3,294,516 16 Percent Dollars Per Dollars Total Generated Paid in Full Day Treated above Control All Days Threat 8 $71,176 $10,883 $ 10,883 Service 7 $111,932 $51,639 $206,557 Civic Duty 12 $76,109 $15,816 $ 31,632 Control 10 $60,293 $ 0 $ 0
  13. 13. Formal Statistical Analysis The mean payment per letter was $174 for all three treatment groups combined and $112 for the control group. The difference in means between the treatment and control groups is thus $62 per letter. There is a fair bit of heterogeneity among treatments. The differences in means are $90 for the service treatment, $21 for the civic duty treatment, and $30 for the threat treatment. The effects are similar in the sole owner sample and smaller if we exclude commercial properties. The only significant positive coefficient is the moral appeal treatment in the sample of sole owners. (See Table 5 for details.)
  14. 14. Statistical Analysis of Discrete Outcomes To gain more insights into the causal impact of the different treatment letters on taxpayer compliance we turn the statistical analysis of discrete outcomes. We focus on two discrete outcomes: 1. “ever paid” 2. “paid in full” We estimate logistic regressions. Empirical results are summarized in Tables 6-11 of the paper. The findings are mixed, but we find some significant effects.
  15. 15. Summary of Findings We find compelling statistical evidence that the appeal to civic duty is an effective strategy for encouraging at least some tax payment and often payment in full. Its most significant impact are on residents with relatively low levels of tax debt ($0 to $300). Stressing the benefits of payment for the provision of city services may also have improved tax compliance. Its most significant impact appears to be on taxpayers with the highest levels of outstanding tax debts (owing more than $3600).
  16. 16. Conclusions We have shown that different notification strategies have the potential to improve Philadelphia tax compliance and collections among tardy city taxpayers. Our findings imply that it may be beneficial to target a message to specific group in the population. Our research provides ample scope for future research. One potential way of improving threat letters may involve providing more specific and relevant, local information to tax payers such as the foreclosure rate with a given neighborhood. We would appreciate any suggestions on how to improve our notification strategies.