Why are Chicago homeowners leaving money on the table?

A year after moving to our new home in Michigan, we faced a big property tax hike. We swallowed hard, but paid it. After all, we had little choice, and it did reflect an increase in the value of our house. Then there is the story about homeowners in Chicago. 

They’ve been hit with property tax increases averaging 13 percent, or around $400 a year. But their tax hike didn’t come because home values climbed. Rather it was because Chicago had to raise rates to help cover underfunded fire and police pensions (to the tune of $589 million over four years).

Here’s where the story gets interesting: The city gave 155,000 middle- and low-income homeowners a one-time chance to significantly soften the blow. But only 11 percent have taken the opportunity, with the rest seemingly preferring to pay the higher taxes. What happened?

It is all about the mechanism Chicago used to reduce their bills. Rather than increasing the property tax exemption—Mayor Rahm Emanuel’s preferred choice—Illinois lawmakers took a page out of the retailer’s book and created a $20 million rebate program in July. The rebates average $150 and some homeowners could get as much as $200. Alas, as of two weeks ago, only about 17,000 homeowners had applied. 

Emanuel didn’t want to repeat the city’s sad history with property tax rebates. In 2010, then-Mayor Richard M. Daley set aside $35 million for refunds, but few homeowners applied and the city distributed only $2.1 million.

“The rebate is not to be there on the books and then, with a nod and a wink, you hope nobody takes it,” said Emanuel last summer. “It’s there to alleviate any financial strain. And we’re gonna make sure that’s what happens when we do it.” 

The city reached out to low-income homeowners through community groups, housing organizations, and places of worship and promoted the program through local news outlets. It even extended the application period by a month. Nothing worked.

One reason may be the onerous application process. Each homeowner must go to one of 26 neighborhood processing centers, complete a six- to eight-page form, present her most recent property tax bill, 2015 federal income tax return or Social Security award letter, and state-issued identification. Pulling together necessary paperwork, getting to a processing center, and completing the application on site could take the better part of a day. 

This, of course, takes another page from retailers, who know that only about half of mail-in rebates are ever redeemed. But the Chicago process was far more complicated than anything businesses could have designed. 

Even worse: Because the rebate program did not begin until late summer, it was out of sync with the timing of both property tax payments and income tax filing. In Chicago, property taxes are due on March 1 and August 1. By the time the rebate program was available later in the summer, people may have already put their property tax bills out of their minds.

That points to another reason Chicago property taxpayers are leaving money on the table: They may not even know how much property tax they pay.

Crain’s Chicago Business reports that most Chicago-area homeowners pay property taxes with their monthly mortgage payment. Lenders push borrowers to set up these escrow accounts both because they reduce the risk that homeowners won’t pay property taxes, and because it gives the banks access to no-interest cash for months before they remit the tax to local governments.

In their paper for the National Bureau of Economic Research, Marika Cabral of the University of Texas-Austin and Caroline Hoxby of Stanford demonstrate that tax escrow reduces homeowner awareness of property taxes. In other words, “tax escrow makes people much less informed about the taxes they pay.” A little property tax ignorance could lead to a little property tax bliss… and little tax rebate uptake. 

Cabral and Hoxby reveal something else. They found that while property taxpayers believe the levy is “disagreeable,” they also say government spends the revenue efficiently. Perhaps middle- and low-income Chicago homeowners are simply willing to pay more for fire and police pensions. 

Or maybe the property tax rebate program was set up to fail. 

The Tax Hound, publishing the first Wednesday of every month, helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns. This story originally appeared on TaxVox.