Renters' Illusion or Savvy?

Abstract

A frequent finding in the local public finance literature is that renters are more likely to support expansions in the local budget than are homeowners. The renters' illusion hypothesis (renters are less aware of tax increases than are homeowners) has been commonly used to explain this behavior This article examines the alternative hypothesis of renters' rationality. It is argued that renters' behavior is a rational and selfish response to a fiscal environment that provides them, as a group, with larger net benefits than it doesfor homeowners. I use bond referendum data to show that, even when renters and homeowners of the same income level are assumed to receive the same net benefits, it is erroneous to interpret the stronger support by renters of the proposals, as previous literature has, as a manifestation of fiscal illusion. The article also makes an attempt to estimate different net benefits from the referendum for renters and homeowners of different income levels.