Major Tax Structures:Property Taxes

Troy University

PA6650- Governmental Budgeting

Chapter 10

Review

• Three Predominant Tax Bases

– INCOME

– Spending on GOODS & SERVICES

– PROPERTY

Overview

• Local governments collect over $300B from property taxes each year

• They produce stable, independent revenue

• Mostly used to source independent school districts

Desirable Features• They are a close approximation to actual

wealth

• Applied to accumulated wealth, not income or consumption

• Not based on transactions

Structural Distinctions• Real Property

– Includes real estate, land, improvements on the land, trees, crops, minerals, buildings, fences

• Personal property– Everything that can be owned that isn’t real property,

like machinery, equipment, jewelry, autos, furniture, stocks and bonds, and much more

– Tangible property is valued for its own sake, like gold or silver

– Intangible property represents a claim of something valuable (stock, financial assets)

Structural Issues

• Advantages– Base is immobile– Tax is stable– Tax rate can locally vary– Benefit-based (e.g., fire and police protection)– Industry can be charged for negative externalities– System is visible– Local government decisions affect property values

Structural Issues

• Disadvantages– Regressive (effective rate higher for low

incomes)– Poor horizontal equity– Taxes create geographic pockets of affluence

and poverty– Tax burden can be high for high-growth

communities– Can reduce prospects for economic

development

Rates, Levies, & Assessed Value

• How much should we tax?– Expenditure plan = E– Revenue estimate from nonproperty sources

= NPV– Property tax levy (E-NPR)– Net Assessed Value (NAV)

• R=(E-NPR)/NAV

Rates, Levies, & Assessed Value

• Tax bill like a layer cake– $4.58 for the village– $1.22 for the county– $3.25 for the school district– $9.05 on the NAV of the property

– Virginia Beach is $.89/$100 of assessed value

Assessments

• Estimates value, distributes the tax burden• Appraisal standards

– Market value– what the property would sell for in cash

– Special exception for agricultural land

– VALUE IN USE – current use value assessment

– Assessment-on-sale or Acquisition value– Properties are revalued when they are sold CA Proposition 13)

– Good for long-term owners that hold property

– Predictable tax payments, predictable revenue for locality

– Area-based (size of property)– Cadastral (physical attributes, like size, design, soil)

Assessment Cycles

• Mass cyclical assessment– All properties valued in a particular year

(every 2-10 years)

• Segmental assessment– Specified fraction of parcels assessed each

year (3-year cycle)

• Annual assessment– Reappraisal and estimates

Assessment Methods

• Market data or comparable sales approach

• Income approach (income-producing properties)

• Cost or summation approach (land-as-is improvements)– Reproduction cost (cost to replicate with its

faults)– Replacement cost (cost to build new with same

utility)

Property Tax Relief Mechanisms

• Exemptions and Abatements

• Exemptions– Reduce the tax base– Granted for certain individuals or institutions

• GOVERNMENT PROPERTY• RELIGIOUS, EDUCATION, CHARITABLE, NONPROFIT• HOMESTEAD, VETERAN, OLD AGE

• Abatements– Negotiated contract that forgives tax for a period of

time

Property Tax Relief Mechanisms

• Problems with exemptions– State changes can adversely affect localities– Programs don’t focus on tax relief for needy– Exemptions may result in an increased tax rate– Individual exemptions don’t reach renters

• Some commercial / industrial exemptions– Pollution, energy equipment

• Fully-exempt properties are significant!

Property Tax Relief Mechanisms

• Circuit Breakers– Residential property circuit breakers

• An adjustment to your income tax• Sometimes targeted to poor and elderly• Some renter-relief programs• Threshold v. sliding scale

• Deferrals– Elderly, disabled, farmers can “pay later”

Property Tax Relief Mechanisms

• Classification– Different effective rates for different types of property– Homeowners, farmers, businesses– There are rich and poor in each category

• Tax Increment Financing– Freezes the value of a property– Offset increases used to pay for infrastructure

Fractional Assessment / Assessment Disparity

• Assessment at less than market value

• How do you know your assessment is fair?

• Affects state-imposed thresholds

• Creates a non-uniform tax burden

• Coefficient of dispersion - variance

Limits and Controls

• Proposition 13 tax revolt

• Maximum growth rates established

• Increased fiscal stress and less flexibility

Conclusion

• Property taxis king for local government

• It taxes wealth

• Assessment is costly and troublesome

• Some strong advantages