1. How Salience and Framing Alter the Behavioral Impacts of Property Tax Relief
Phuong Nguyen-Hoang and John Yinger
Adds behavioral economics to:
Tae Ho Eom, William Duncombe, Phuong Nguyen-Hoang, and John Yinger “The Unintended Consequences of Property Tax Relief: New York State’s STAR Program.” Education Finance and Policy 9 (4) (Fall):

2. The STAR Program
In 1997 New York State passed the School Tax Relief Program or STAR for all homeowners in the state.
STAR is a homestead exemption; that is, it exempts the first $X dollars of house value from the school property tax.
From to , this exemption was supplemented with a rebate check equal to 30% or more of the initial STAR savings.

3. The Objective of this Paper
Our objective is to determine whether these two algebraically equivalent but administratively distinct provisions led to different behavioral responses.
We estimate associated differences in the demand for school quality and draw on the new literature on behavioral public finance to see if these differences can be explained by the concepts of salience or framing.

4. The Plan of this Presentation
The STAR Incentives
The Eom et al. Approach
Key concepts from behavioral economics: salience and framing
The administration of STAR and behavioral economics
Hypotheses and Econometric Approach
Key results

5. Introduction
The STAR Incentives
STAR affects a voter’s school tax share, which is the amount a voter must pay for a $1 increase in property taxes per pupil.
This tax share is part of the price of education; a drop in tax share is like a drop in price—and leads to a higher demand for education, among other things.

6. The STAR Incentives, 2 With STAR, a homeowner’s tax share is .
Without STAR, a homeowner’s tax share is where V is the voter’s house value and is property value per pupil.
Households with relatively expensive houses have higher tax shares.
Homeowners in districts with a lot of non-residential property have lower tax shares.
With STAR, a homeowner’s tax share is

7. The STAR Incentives, 3
Thus, STAR multiplies a homeowner’s standard tax share by (1 – X/V):
This formula shows that STAR is equivalent to an open-ended matching grant with a matching rate of X/V.
The average STAR tax share, (1 - X/V), is 0.77, which represents a 23% cut in the price of education.

8. The STAR Incentives, 4 The standard value of X is $30,000.
However, X is multiplied by a “sales price differential factor” (SPDF), which indicates the average sales price in a district’s county relative to the state average (not to fall below 1.0).
Thus, X is over $90,000 in some districts.

9. The STAR Incentives, 5
In every homeowner received a rebate equal to 30% of their STAR tax savings, so their tax share was:
In and , the rebate percentage varied from 30% to 60%, depending on the taxpayer’s income.
Taxpayers with incomes above $250,000 received no rebate.

10. The STAR Timeline
1997: Passed at end of legislative session : Introduction of enhanced exemption : Basic exemption: $10, : Basic exemption: $20, : Basic exemption: $30, : STAR income tax rebate = 30% of STAR tax savings : Rebate percentage tied to income; no rebate if income > $250, : Income tax rebate eliminated

11. Variation in STAR
STAR Exemptions in Various Counties, Including Rebates

12. The Eom et al. Approach
Following Eom et al., we estimate a 2-equation structural model of education costs, efficiency, and demand for school quality at the school-district level.
The data begin one year before STAR ( ) and end two years after the rebates ended ( ).
We measure school quality using an index of test scores and graduation rates.
We estimate a cost/efficiency or expenditure equation and a school quality demand equation for school districts in NY (excluding NYC).

13. The Eom et al. Approach, 2
The expenditure equation estimates the cost of school quality adjusted for efficiency.
We estimate the impact of student traits and wages (endogenous) on education costs.
We cannot observe efficiency directly, but account for it using theoretical linkages between observable community traits and voter monitoring.

14. The Eom et al. Approach, 3
The demand for school quality (equation 2) depends on a voter’s tax price (among other things).
Tax price depends on standard tax share, the STAR tax share (perhaps adjusted for rebates), the marginal cost of school quality, and school district efficiency.
The cost and efficiency parameters can be identified from the expenditure equation.

15. The Eom et al. Approach, 4
The demand for school quality (equation 2) also depends on state aid.
Previous studies find that aid has a larger impact on school quality than does an equivalent amount of voter income.
This is called a flypaper effect.
We also estimate flypaper effects—and the impact on them of salience of framing.

16. Behavioral Economics: Salience
Starting with Chetty, Loony, and Kroft (AER 2009), many studies have found that behavioral responses to a tax are larger if the tax is “salient,” which is a synonym of “visible” and “prominent.”
Chetty et al. find larger responses to taxes included in posted prices than to taxes added at the check-out .
Cabral and Hoxby (working paper, 2012) find larger responses to a property tax if it is not hidden in an escrow account.

17. Behavioral Economics: Framing
Taxpayers’ behavioral responses to a tax provision may depend on the way it is framed, i.e. linked to existing household mental accounts.
One study finds, e.g., that the marginal propensity to spend on child clothing is larger out of child allowance payments than out of other income sources.
STAR exemptions appear on a property tax bill and are thus linked to school budgets, whereas rebate checks arrive in the mail as unlabeled income.

18. STAR Administration
The application of these principles to STAR is linked to administrative details.
First, STAR was introduced with great fanfare. An exemption for the elderly was implemented a year before basic STAR; every homeowner received notice; politicians touted it.
The application form was simple—and only had to be submitted once.

20. STAR Administration, 2
Information on STAR exemptions is available May 1 (on the “tentative assessment roll”) before the school budget votes at the end of May.
The votes set policy for the school year that starts the next fall, when school tax bills (with STAR information) are paid.
People have to appeal their assessment in May and may file a lawsuit if they wish to contest the assessor’s final decision.

21. Example of Property Tax Bill with STAR Information

22. STAR Administration, 3
The STAR exemption was phased in over 3 years: $10,000 in 2000, $20,000 in 2001, and $30,000 in 2002.
Changes in the STAR exemption (and associated tax savings) after the phase-in period come from the SPDF and are small and unpredictable .
Changes in STAR are available on the “tentative assessment roll” before budget votes—if a homeowner looks (as they might if they want to appeal their assessment).

23. STAR Administration, 4
The rebate program was proposed in early but passed in June 2006 after the school budget votes for
Every homeowner received a rebate in the fall of 2006—with no need to apply.
A simple application was required the next year (with a new formula); there was extensive publicity (but no “rebate” entry on the assessment roll or tax bill).
The rebates were repealed after 3 years.

24. Examples of Tentative Assessment Rolls, 2006 and 2007 (FY 2006-07 and
$30,000 Exemption
Examples of Tentative Assessment Rolls, 2006 and 2007 (FY and
FY )
$39,070 Exemption

25. Hypotheses
This analysis of STAR, the demand for school quality, salience, and framing leads to the 3 main hypotheses on the following slides.
Other hypotheses concerning the impact of demonstrated awareness of assessments (measured by appeals) and the flypaper effects associated with state aid can be found in the paper.

26. Hypothesis 1
The price elasticity, μ, associated with the exemption-based STAR tax share will be larger in absolute value than the μ associated with the standard tax share.
The STAR tax share is more salient and should therefore elicit a larger response.

27. Hypothesis 2
The STAR price elasticity will be largest (in absolute value) in early years when basic STAR was being phased in.
STAR was highly salient from the beginning, thanks to the earlier roll-out of enhanced STAR and extensive publicity efforts.
The tax savings during the phase-in were large, unlike the small, random changes in later years due to the SPDF.

28. Hypothesis 3
The effective STAR tax share will not reflect rebates because they are framed as unlabeled income, not as part of the local education budget.
Salience may affect response to the rebates in (since they were not in place in time for the budget votes) but not in later years.

29. Econometric Approach
We estimate the same structural model as Eom et al. except that we allow the price elasticities and flypaper effects to vary over time.
This time variation makes it possible to test our hypotheses about the role of salience and framing in the behavioral responses to STAR provisions.

30. Econometric Approach, 2
This structural model includes district fixed effects.
It is estimated with 2SLS, with the STAR variables (and others) treated as endogenous.
STAR might alter a district’s property values, which appear in the STAR tax share.

31. Results
We find statistically significant support for our three main hypotheses
Hypothesis 1: Even after the phase-in period, the μ associated with the STAR tax share (-0.72) is larger in absolute value than the μ associated with the standard tax share (-0.17).
This supports the hypothesis that salience matters.

32. Results, 2
Hypothesis 2: During the 3 phase-in years, the μ’s associated with the STAR tax share (-3.03, ) are larger in absolute value than the μ for the STAR tax share in later years (-0.72) .
Publicity and the magnitude of the savings affect the salience of the exemptions—and hence the response to them.

33. Results, 3
Hypothesis 3: We can reject a with- rebates specification in favor of a without-rebates specification (for all 3 rebate years).
The lack of response to rebates occurs in all 3 rebate years, not just in the 1st year when they might not be salient.
Framing matters, too!

34. Results, 4 The test for Hypothesis 3 is unusual.
Recall that the STAR tax share comes from:
Standard STAR
We estimate a double-log demand equation.
There is no algebraically clean way to separate the exemption-based (X) and the rebate-based (τ) portions of the STAR tax share.

35. Results, 5 So our strategy is to estimate two models:
First, we estimate a model leaving rebates out of the tax share in the rebate years.
If this is incorrect, we have (approximately) divided the tax share variable by (1+ τ), so the coefficient (μ) should be multiplied by (1+ τ), compared to non-rebate years.
We can reject this. The coefficient actually goes down.

36. Results, 6
Second, we estimate a model adding rebates to the tax share. If this is correct, the μ in the rebate years should be the same as in the surrounding years. If this is incorrect, we have, in effect, multiplied the variable by (1+ τ), and hence divided the coefficient by (1+ τ), compared to the non-rebate years.
In this case we cannot reject the alternative hypothesis because the estimated μ is lower than in the surrounding years.
Both tests indicate that, due to the framing of rebates as unallocated income, voters ignore the rebates in making school quality decisions.

37. Key Conclusions
The administrative mechanism through which tax relief is delivered can affect the behavioral response to the relief.
Behavioral responses to property tax exemptions are larger when the tax savings and publicity are larger.
Property tax provisions framed as unlabeled income have a smaller impact on the demand for school quality than do equivalent provisions framed as property tax cuts.

38. Hypothesis About the Flypaper Effect
As Bradford and Oates pointed out long ago, the value of $1 of aid to a voter depends on the voter’s tax share.
Unlike other studies we define the flypaper effect as the impact of $1 of aid adjusted for tax share (including the STAR component) on the demand for school quality relative to $1 of income.
Without this adjustment, the flypaper effect is underestimated.

39. Hypothesis 4
The STAR-adjusted flypaper effect, f, will be smallest in the early STAR years.
The high salience of STAR in the early years suggests that voters were more likely in those years to realize that the STAR tax-share lowered the value to them of $1 of state aid.

40. Hypothesis 5
Because of the way they are framed, rebates will not affect the perceived value of state aid to voters and will therefore not affect the flypaper effect.
In other words, the value of f in a no-rebate specification will be about the same in the rebate years as in the non-rebate years after the phase in.

41. Results, 7
Hypothesis 4: During the 3 phase-in years, the f’s (35.8, 41.0, and 54.4) are smaller than the f in the post-phase, non- rebate years (56.2) .
Publicity and the magnitude of the savings affect the salience of the exemptions—and hence the extent to which they affect the perceived value of state aid.

42. Results, 8
Hypothesis 5: The value of f in the first two rebate years (with a no-rebate specification) are not significantly different than the value in the surrounding post-phase-in years (56.2).
The value of f in the 3rd rebate year is smaller (42.8), perhaps because of the economic and political uncertainty in the spring of 2008, with a change in governor and an expected recession.

43. Results, 9
A price response can be decomposed into an income effect and a substitution effect.
The income effect could have a flypaper effect attached.
We present preliminary evidence that the flypaper effect associated with this income effect is similar in magnitude to the flypaper effect associated with state aid.

44. Results, 10
We know the share of homeowners who file for a formal judicial assessment review in small claims court or the NYS Supreme Court—an indicator of homeowner awareness.
As expected, we find that more reviews, the stronger the behavioral response to the STAR tax share, particularly in 2000, when basic STAR was at its most salient.

45. Results, 11