Property Taxes

1. PA 546 Constantine Hadjilambrinos Property Taxes Lecture 8 October 18, 2005

2. PA 546 Constantine Hadjilambrinos • Property taxes are local governments’ primary source of tax revenue (72.3%). • Irreplaceable, in that there is no other tax source that can be locally levied and administered. • Only approximation to a “wealth” tax—promotes equity: • Top 1% of income earners own 30% of wealth. • Top 1% of income earners receive 20% of income. • Generally applied to real property.

3. PA 546 Constantine Hadjilambrinos Types of property Real Land and improvements Personal Everything that can be owned that is not real property Tangible Property held for its own sake (Cars, TVs, books) Intangible Property representing ownership of something of value (Stocks, bonds, financial assets)

4. PA 546 Constantine Hadjilambrinos Property tax design • In U.S. property tax rates are, generally, not pre-set—they are calculated on the basis of expenditures and revenues from other sources. E=Total of approved expenditures NPR=Estimate of total non-property tax revenues NAV=Net assessed value

5. PA 546 Constantine Hadjilambrinos Example E = Total of approved expenditures $95,000 NPR = Estimate of total non-property tax revenues $15,000 NAV=Net assessed value $1,750,000 r = .0458 or 4.58%

6. PA 546 Constantine Hadjilambrinos • Several jurisdictions (i.e. city, county, school district) often levy property taxes on the same property. • Property tax is levied on the estimated value of the property. This value is estimated through an assessment process. • Assessed value is very often different from the market value. • Market value is the price at which a willing buyer and a willing seller agree to complete a transaction.

7. PA 546 Constantine Hadjilambrinos Effective Tax Rate • Because of the significant differences in ways in which property values for tax purposes are calculated. = r x AR

8. PA 546 Constantine Hadjilambrinos Property appraisal (assessment) process is crucial. The most widely used standard is market value. • Widely recognized and consistent standard • Testable • Markets may not always operate effectively • Actual prices may not reflect true value Often there are special exemptions for certain uses and users.

9. PA 546 Constantine Hadjilambrinos Less widely used standard—reassessment on sale. • Avoids taxing property owners for unrealized gains on their property • Assures predictability of tax payments for property owners • Achieves revenue stability for local governments (?) • Disrupts housing market • Encourages unrecorded property transactions • Does not meet equity criteria

10. PA 546 Constantine Hadjilambrinos Doing Assessment: Cycles • Mass cyclical assessment—all properties assessed once within a set number of years. • Segmental assessment—a set proportion of the properties in a jurisdiction are assessed every year. • Annual—all properties assessed each year (it has to be a true assessment).

11. PA 546 Constantine Hadjilambrinos Doing Assessment: Approaches • Market data (comparable sales)—good for properties that are not unique. • Income—good for properties that are income-producing. • Cost (summation)—good for unique properties. • Reproduction cost—cost of re-building the exact same building. • Replacement cost—cost of replacing building with one of comparable utility.

12. PA 546 Constantine Hadjilambrinos Exemptions and Abatements Granted to certain institutions and individuals or to certain types of property. • Homestead—primary residence. • Veterans—to military veterans. • Old-age—to individuals of a certain age. • Business incentives—granted to attract business. • Government property (tax exempt) • Religious, educational, charitable, and other non-profit entities (generally tax exempt)

13. PA 546 Constantine Hadjilambrinos Circuit-Breakers Designed to focus property tax relief to those individuals most in need. • Requires integration of property and income tax systems. • Program cost sets limits to which individuals may benefit. • Income needs to be defined more broadly than federal or state taxable income. • Renters may deserve relief more than homeowners.

14. PA 546 Constantine Hadjilambrinos Deferrals • Tax deferred to a later date—not excused. • Deferrals address most of the problems circuit-breakers and exemptions attempt to address, but without many of the design problems inherent in the latter.

15. PA 546 Constantine Hadjilambrinos Classification • Different tax rates apply to different types of properties. • Assumes that some classes of properties have greater tax-bearing capacity than others. • There is more variation in tax-bearing capacity within classes of properties than between.

16. PA 546 Constantine Hadjilambrinos Tax Increment Financing Extra taxes generated by increase in value of property due to development are targeted to promoting the development. • Can be effective in promoting development. • Diverts revenue from normal uses (such as school financing). • Can be misused if returned to recoup costs not related to improving infrastructure around development project.

17. PA 546 Constantine Hadjilambrinos Measuring assessment disparities • Coefficient of Dispersion (CD) can measure the degree of disparity. • CD measures the extent of differences in assessment ratios, i.e. the extent to which effective property tax rates vary within a jurisdiction. • Calculation of CD requires knowledge of true market value of property.

18. PA 546 Constantine Hadjilambrinos Limits and Controls Unpopularity of property taxes led to the imposition of various limits and controls. • Statutory property tax rate limits. • Property tax rate freezes. • Property tax levy limits. • Local expenditure lids.