Policy Recommendations

Proposals For Tax Sale Reform: Outreach and Profit Rebates

Given the evidence presented that tax sales can displace long-time residents from their neighborhoods and widen housing inequality between neighborhoods and demographic groups within a city, many have called for reforms to the property tax system.1 Tax sales exist because local governments rely on property tax revenues to support the budget. Severe tax delinquency may require the government to reduce spending on public goods and services if revenues cannot be recouped through auctions. Curtailing the use of property tax sales may also result in increased reliance on other, highly regressive local taxes, such as retail sales taxes. Such taxes disproportionately affect low-income individuals who spend a larger fraction of their income on necessities, such as food or clothing.2

There is a relatively low-cost, proven method of reducing tax delinquency and its disparate impacts on marginalized communities that does not involve drastically overhauling the use of tax lien auctions. In 2015, Philadelphia ran an experiment in which the government mailed letters threatening auction foreclosure to a random sample of overdue taxpayers. Each letter cost the city only 1 dollar to send but returned, on average, 65 dollars in tax revenues for the same fiscal year.3 A research team supported by Housing and Urban Development (HUD) ran a similar experiment. The research team sent quarterly reminders to pay property taxes to a random sample of elderly homeowners with reverse mortgage loans. The regular reminders reduced the probability of defaulting on payments by 30 percent.4

But some cities like D.C. already mail regular letters threatening to sell off claims to the property if the tax debt remains unpaid. D.C. even offers translation services in six languages for its taxpayers and includes a disclaimer in bold red font at the top of the first page of each delinquency notice:5

FAILURE TO PAY TAXES IMMEDIATELY MAY HAVE SERIOUS CONSEQUENCES, WHICH MAY INCLUDE LOSS OF TITLE TO THE PROPERTY. 

Even with reminders and clearly stated consequences, there are still taxpayers who lack the financial means or cognitive function to be able to pay off their tax debt. So, what else can be done? One option is public investment in financial counseling services and door-to-door outreach to other interested parties with a legal affiliation to the delinquent taxpayer to help make debt redemption more likely. In the 4,368 cases where the previous owner loses their house following a tax sale, ownership stays within the family only 37 percent of the time.6 Counseling-based “nudges” would complement existing D.C. government programs offering tax payment deferrals for low-income elderly homeowners, thus helping to preserve home equity for future heirs.7

And what about surplus revenues generated by tax sale auctions? Reforms regarding whether these revenues ought to be rebated back to the original homeowner may come about soon through the United States Supreme Court. In an upcoming Spring 2023 case that involves a 94-year-old widow who lost her 40-thousand-dollar home in Minnesota for failing to pay a 15-thousand-dollar tax debt, the Justices will decide whether such a seizure is permissible under the Constitution.8 Given the large gap between the underlying tax debt and the assessed values of tax foreclosed homes obtained by investors through the tax auction process, cities like D.C. can rebate the 238 million dollars in cumulative auction surplus revenues (see Figure 1) back to the delinquent taxpayers without breaking the municipal budget or significantly harming investors’ returns.  

  1. Rao, John (2012): “The Other Foreclosure Crisis: Property Tax Lien Sales,” NCLC National Consumer Law Center report: https://www.nclc.org/issues/the-other-foreclosure-crisis.html (accessed March 5, 2023).↩︎

  2. Besley, Timothy J. & Harvey S. Rosen (1999): “Sales Tax and Prices: An Empirical Analysis,” National Tax Journal, 52(2): 151-323.↩︎

  3. Chirico, Michael, Robert Inman, Charles Loeffler, John MacDonald, & Holder Sieg (2019): “Deterring Property Tax Delinquency in Philadelphia: An Experimental Evaluation of Nudge Strategies,” National Tax Journal, 72(3): 479-506.↩︎

  4. Moulton, Stephanie, J. Michael Collins, Cäzilia Loibl, Donald Haurin, & Julia Brown (2022): “Property Tax Compliance and Reverse Mortgages: Using Nudges to Improve the Market,” National Tax Journal, 75(1): 33-59.↩︎

  5. D.C. Office of Tax and Revenue, Real Property Tax Sale 2022 Tax Sale Notice [link] (accessed February 15, 2023).↩︎

  6. Tabulations based on LaPoint’s analysis of title transfers in CoreLogic Deeds linked to tax lien sale records from D.C. Office of Tax and Revenue.↩︎

  7. D.C. Office of Tax and Revenue, Real Property Tax Relief and Tax Credits: https://otr.cfo.dc.gov/page/real-property-tax-relief-and-tax-credits (accessed February 15, 2023).↩︎

  8. Tyler v. Hennepin County, Minnesota: https://www.supremecourt.gov/docket/docketfiles/html/public/22-166.html↩︎