The Theory of Property Taxation Lecturer: Jack Wu
Outline Topic I: What Are Property Taxes? Topic II: Property Tax Incidence Topic III: Property Tax Capitalization Topic IV: Property Tax Competition and Provision of Local Public Goods
What are Property Taxes? 1.What are Properties? 2.Defining Property Tax 3.Why levying property tax? 4.Mechanics of Property Taxation 5.The Property Tax Process 6.Economic Issues of Property Tax
1. What are Properties? Property v.s. Wealth Taxonomy of Property
Property v.s. Wealth Property: A. something that someone owns B. any tangible or intangible possession owned by someone C. real estate (land or building) that someone owns Wealth: the money value of property
Taxonomy of Property Property can be classified as: Personal (Movable) property 動產 v.s. Real property 不動產 Tangible有形 property v.s. Intangible無形 property
2. Defining Property Tax Narrowly Defined Property Taxes Property Tax in Tax Structure Broadly defined property taxes Property Tax Revenues
Narrowly Defined Property Tax Property tax is the tax on the property holding. (note: acquiring, holding, transfer) Property tax is an ad valorem tax that an owner of real estate or other property pays on the value of the thing taxed. (note: it is difficult to levy a tax on personal or movable property)
Property Tax in Tax Structure National Tax/ Central Tax Municipal and County Tax/ Local Tax In most countries, property tax is the most important local tax.
Broadly Defined Property Tax According to OECD classification, taxes on property include: 1.Recurrent taxes on immovable property 2.Recurrent taxes on net wealth 3.Estate, Inheritance, and gift taxes 4.Taxes on financial and capital transactions 5.Other non-recurrent taxes on property 6.Other recurrent taxes on property
Table: 現行財產稅目及其稅收分配 • 資料來源：財政部賦稅署。 • 說明： • 根據1999年1月25日增修訂之財政收支劃分法。 • 本表所示資料更新截止日為2009年5月31日。 • 附註： • “A”係指營業稅收入減除依法提撥之統一發票給獎獎金之40%。 • ※(1) 18%按人口比例分配直轄市及台灣省各縣(市) 。 (2) 2%按人口比例分配福建省金門及連江二縣。 • ◎台北縣徵起之土地增值稅自2008年1月1日起準用直轄市規定，即徵起收入100%均歸該縣所有。
3.Why Levying Property Tax? Canons of Taxation Virtues of property tax
Canons of Taxation Simple Equitable (horizontal, vertical, inter-generational, and process equity) Stable Non- or least distortion Low administration and compliance costs
Virtues of Property Tax An old tax A stable tax An easy-to-administer tax A benefit tax A tax that allows local control A visible tax
An Old Tax An old tax is a good tax. Principle of good tax policy: a tax system should change infrequently.
A Stable Tax Stability and reliability are considered two requirements for creating a sound tax system. Few taxes are more reliable than those on real property. Unlike other local taxes, the property tax base cannot be moved. The revenue from such a captive tax base can be relied on to a greater extent than either wage or sales taxes – both of which have highly mobile tax bases. The steady growth of property tax revenue (real property values appreciate over time) can meet future public service needs.
An Easy-To-Administer Tax The governments’ administration of property tax and taxpayers’ compliance with the property tax are relatively straightforward and inexpensive. The tax is easy to administer because the underlying tax base is immobile and easily identifiable. Moreover, taxpayers cannot easily hide or move property. Thus, the property tax is hard for property owners to evade. Most taxpayers (property owners) face minimal compliance cost because they do not need to fill out any property tax form.
A Benefit Tax Property tax revenue is raised locally to support local public services. Thus, the connection between the source of revenue (property) and what is being provided (public services) has stayed strong. The local public services provided benefit the owners of property within the jurisdiction. The beneficiary of the public services is the property owner, and under the benefit principle of taxation, it is the property owner who should be paying for the services. Many economists have recognized property tax is a benefit tax.
A Tax that Allows Local Control The property tax is the best available independent source of local revenue. The property tax has given local constituencies control over their financial matters. Local fiscal autonomy is a direct result of reliance on property taxes. Central government does not levy tax on real property. Thus, theoretically, local governments should have greater flexibility with the property tax system than with other major taxes.
A Visible Tax Taxpayers know the amount , the frequency, and the purpose of the property tax. Unlike sales taxes (which are paid to vendors) or income taxes (which are generally withheld by employers), property taxes are generally paid to the government.
4.Mechanics of Property Taxation Major issues of Property Tax Property Tax Base Valuation Methods Property Tax Rates Property Tax Relief Measures
Major issues Tax base issue: How is the tax base defined and measured? Tax rate issue: What political groups have responsibility for setting tax rates and how those rates are measured? Economic effect issue: What policies are used to reduce overall property taxes or to alter the distribution of tax among different types of properties and taxpayers?
Property Tax Base Market value of property The tax base of property tax is the market value of property Assessment value of property: Not all of properties are not transacted in the market in the given year, so it is necessary to assess the value of property annually by tax assessors.
Valuation Methods Market Value approach 市場價值比較法 Income capitalization approach 所得還原法 Replacement cost approach重置成本法
Market Value Approach Use the observed market prices for properties to estimate value for a subject property. • Suppose that we want to value a three bedroom, two bath home in the Dogwood Subdivision. • We could analyze the sales prices for all such comparable homes over the past year to value the subject property.
Income Capitalization Approach For income producing properties, we can estimate value by computing the discounted present value of the net income stream generated by the properties. • We need information on net income to do this.
Replacement Cost Approach To estimate the value of property by computing the replacement cost and subtracting depreciation. • This is the only alternative for unique properties, or properties for which an active market has not developed, or for which no net income data is available.
Three approaches to value • In theory, all three approaches to value should lead to the same conclusion, or very nearly the same conclusion. • In practice, they differ and it is important for the assessor to understand the strengths and weaknesses of each approach.
Summary In most instances, the market value approach is used to assess single-family homes and land for which there are often numerous sales, while the replacement cost and income capitalization approaches are usually used for commercial and industrial properties.
Assessment Ratio Rule An assessor computes the assessed value of each piece of property from an estimate of the property’s market value according to a specific set of procedures , usually established by law. Given that estimate of market value, the assessed value is specified by law or common practice as some specific percentage of market value, called the assessment ratio rule, or at least must be within some specified range of percentage of market value.
Classified Property Taxes If different types or classes of property are assessed according to different assessment ratio rules, the tax is called classified property tax. Residential property are usually assessed at a lower ratio than commercial and industrial property. In addition, some types of property may be exempt from property tax. The assessed value of these properties is set equal to zero.
Property Tax Rates How to set the tax rate? Property tax rate and Local Public Services Nominal tax rate and effective tax rate
How to set the tax rate? Property tax revenue= tax rate*Tax base Given the total assessed value of all properties in a taxing jurisdiction, the local government sets a tax rate sufficient to generate the desired property tax revenue. Central laws constrain the local government in setting the property tax rate by limiting the tax rate, property tax revenue, or both.
Property Tax Rate and Local Public Services • Many local governments rely on the Property Tax to fund local public services. Hence, the Property Tax rate is actually a combination of many rates. • Each local government unit sets its own rate, taking into account desired public service levels and the tax base.
Nominal Property Tax Rates • The nominal tax rate is t = T/Va T the tax paid Va the assessed value • The assessed value Va is a fraction of the market value. Let a the assessment ratio, Va = aV a = Va/V.
Effective Tax Rate The effective tax rate, the ratio of tax to market value, is a usual way to characterize property tax levels on different properties or in different jurisdictions. Because tax is compared to market value, the effective tax rate corrects for any difference in assessment ratios.
Effective Property Tax Rate • The effective tax rate is the ratio of the tax paid to the market value of the property: t= T/V. • Substitution for V gives the relationship t= at. Hence, the effective tax rate is a combination of the nominal tax rate and the assessment ratio.