And if property taxes go up on my landlord, my rent goes up to cover it.
Similar apartments in your area are similarly priced. That's because they're obeying supply and demand. If your landlord's car payments go up and she raises the rent to make up the difference, the similar apartment down the street--owned by someone who's car payments haven't changed--suddenly looks more attractive so you move. So she can't raise the rents like that because the market has no reason to move as a whole. Her car payments don't alter the supply or demand for apartments in your area.
But if the taxes she has to pay go up, they go up for all the landlords in your area. That impacts the cost of providing an apartment and removes apartments that are marginally profitable from the market; in economic terms it's an inward shift in the supply curve. So the price for apartments in your area goes up.
It doesn't remove them from the market, because the new (higher) property tax must be paid whether the landlord continues to let the property, lives there herself, or sells the property to a new owner.
If we were talking about an increase in the income taxes levied on rental income, then your thesis would hold. In this case, as taxes on rental income were to rise, so would the additional benefit of renting vs. living in the property myself. At some point, it flips, and it becomes better for me to just live there. The post-tax rent just isn't worth it compared to the benefit of me (the landlord) living there.
However, a property tax which is fixed with respect to the use of the property (rented or owner-occupied) and, if applicable, rental income, would not have the same effect. The annual property tax must be paid whatever happens, and it is a sunk cost that everybody must pay. It does not affect marginal decisions (buy vs. keep; rent vs. owner-occupy).
Hmm, I don't see how increasing the price of an input fails to increase its price. The "somebody's gotta own it" argument isn't convincing.
Not that confident in this, but here's my take: it does affect keep vs sell: if you can't afford to to keep it (because your rent income no longer justifies your costs) then you have to sell it. To whom do you sell it? Not other people who wish to be landlords, presumably, because they'd in the same bind as you. But the housing price sinks until someone buys it to live in (their property taxes sink too!). Perhaps you even sell to yourself by refinancing and then move in.
Either the landlord has to eat that increase in price out of their profit margin, or it gets passed on to the customer.
Sewage/water costs of apartment go up and he raises the rent to compensate? Net zero increase in his taxes because the sewer/water cost is deductible against the rental income.
Guess which one he's more likely to do?
However, a stupid landlord buying a Ferrari and raising your rent to cover it doesn't affect an entire market. You just move someplace else with a less stupid landlord and lower rent.
You think the assumptions of the model don't hold, which is a reasonable belief. Can you point to any empirical evidence that might help us disprove the theory?