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t. e. Median household income and taxes. Most local governments in the United States impose a property tax, also known as a millage rate, as a principal source of revenue. [1] This tax may be imposed on real estate or personal property. The tax is nearly always computed as the fair market value of the property, multiplied by an assessment ratio ...
- Overview
- The development of property taxation
- Administration
- Tax rates
- Theory of property taxation
Written byC. Lowell Harriss,
C. Lowell Harriss
Emeritus Professor of Economics, Columbia University. Coauthor of American Public Finance and others.
Charles E. McLure
Charles E. McLure
Senior Fellow, Hoover Institution on War, Revolution and Peace, Stanford University, California. Author of The Value Added Tax: Key to Deficit Reduction and others.
One of the most difficult problems in taxing property is determining a reasonable basis of assessment. The problem has grown more difficult as the complexities of economic life have increased. The taxes of the ancient world, of parts of medieval Europe, and of the American colonies were originally land taxes based on area rather than on value. Eventually, the property’s gross output (e.g., annual income) came to serve as the base of taxation. At a later stage, attempts were made to find a measure of what would now be called the property owner’s “ability to pay,” meaning that other forms of wealth and personal property, such as farmhouses, animals, and implements, were included in the assessment. Identifying this type of property effectively for taxation has always been difficult, and the taxation of intangible forms of wealth has proved even harder, especially because intangible property is so easily hidden from tax assessors.
In North America the early New England colonies developed taxes that sought to reach all of the “visible estate,” both real and personal. This “general property tax,” which applied to all property, was on the statute books of some U.S. states by 1800. In fact, during the colonial period, the southern and middle colonies had made relatively little use of property taxation, but, by the middle of the 19th century, property taxes had become the principal source of revenue for all the states. The base of the general property tax was defined to include intangible wealth. Since the value of mortgages and other intangibles consisted largely of claims to rights in real estate and tangible personal property, the result was double taxation. Because the double burden seemed unfair and because concealment was easy, enforcement of the “property” tax on intangibles became problematic. This led to the disintegration of a general tax on all property. Today real estate alone accounts for the bulk of the U.S. property tax base.
Responsibility for the various phases of administration rests almost entirely upon government officials. Administration involves the discovery or identification of the property to be taxed, its valuation, the application of the appropriate tax rate, and collection. Where the amount of tax is measured by income, the property’s income rather than capital value must be determined. Important aspects, especially valuation, are a matter of judgment rather than of fact. The determination of value for tax purposes is not an incidental result, or an automatic by-product, of a transaction entered into for other purposes, such as a wage payment or a retail sale. While property taxes are sometimes based on reported sales values, these can be manipulated to reduce taxes.
The three principal approaches to the contemporary assessment of property are rental value, capital value, and market value. In European countries the assessment of real property is commonly based on its capital value. The traditional thinking is that capital value can be estimated on the basis of rental values, treating them as earnings on capital. However, most European countries, as well as the United States, endeavour to assess property according to its fair market value. It has been the practice in most Asian countries to base the assessment on the annual rental value of the property. Under the principle of rental value, the tax is based on the average gross rental income the property is expected to generate in normal market conditions. Some Asian countries employ a less-complex but possibly less-fair approach. They simply collect a fixed amount based on a particular unit of land measurement.
Difficult administrative problems arise in determining (1) what actually exists in a physical sense (the location, topography, and area of a piece of land; the size, materials, and condition of buildings; the number and types of machines or items of inventory) and (2) the value of the property. The effective determination of property value requires skilled personnel, access to information of various types (including physical characteristics of the property and realistic market conditions), and appropriate facilities, many of which are difficult to provide at the local government level.
Better administration of the property tax will depend on a number of variables, such as better mapping and improved means of obtaining accurate and up-to-date property descriptions. The situation would also be improved through more sources of data about values and more-sophisticated approaches to valuation. Calculations of value range from the simple to the complex. For some types of properties, such as single-family residences, sales of generally similar properties, known as “comparables,” provide a good basis for valuation. Other properties, such as office and apartment buildings, can be valued on the basis of the income they yield. For unique and highly specialized properties, however—including factory and other buildings that are integral parts of a business operation—the value for tax purposes must rest on estimates of the reproduction cost (the cost to replicate an identical structure) minus depreciation. Business inventories, which can also be subject to a property tax, may be valued on the basis of company records, as may machinery and equipment.
Good assessment requires the skills of a permanent professional staff working full time at pay comparable to that in private industry. Each staff member must be free of political pressure. Such staffs are virtually nonexistent, however. In the United States, for example, assessors have typically been part-time officials, usually elected, poorly paid, and frequently lacking the special training now recognized as essential. Lack of experience has sometimes been compounded by favouritism and corruption—either on the part of the assessor or the local government. Rarely are staffs given the resources to make reasonably current assessments on all properties in the jurisdiction. Yet the pace of change and the amount of new construction are so great as to make many assessments significantly obsolete before a new assessment cycle can correct them. Keeping maps and records up-to-date calls for more continuing work than most governments will support, though contemporary data-processing techniques have helped reduce the burden.
Because the tax base, and hence the amount of tax payable, depend upon an official’s estimate rather than on a free-market test (as with a sales tax) or on the taxpayer’s report (as with an income tax), the taxpayer does not participate in the determination of the assessment. Municipalities usually provide some means to appeal the assessment before it becomes final, but the results of such appeals are often inconsequential. Some taxpayers are unaware of procedure, or they may not consider the possible saving worth the effort of appealing. The appeals process is complicated by the common practice, seen in most countries, of assessing a property at only a fraction of the current market value—even when the governing law specifies that assessment shall be at 100 percent. (These below-market valuations are typically compensated for by higher tax rates.) In these cases, when most properties are assessed at prices below the market value, those property owners who complain that their assessments are unfairly high are unlikely to prevail.
Given the frequency of below-market assessments, nominal tax rates give a misleading impression of the tax burden shouldered by property owners. Formerly, when government functions were limited and the property tax was the sole source of local income, tax rates were determined simply by dividing the figure for estimated expenditure by that for assessed valuation. If spending was to be $400,000 and total assessments in the jurisdiction were $40,000,000, a rate of 1 percent would suffice.
Today officials are more likely to estimate the amount that will be available if the existing tax rate is maintained and then try to judge whether taxpayers will accept higher taxes as a means of funding additional spending. When a strong demand for some particular service appears but officials prefer not to raise their “general fund” rates, a legislative body may vote to mandate a “special” rate. For example, U.S. state governments formerly used the property tax as a flexible element, relying primarily on other taxes. According to whether these were inadequate or in surplus, the state would raise or lower its property tax rate. Many states still have constitutional power to do so.
The property tax illustrates the concept of tax incidence—that is, the identification of the parties who ultimately pay for the tax, either directly or indirectly. The tax on land is likely to be capitalized (absorbed in the future profit to be realized from the property) to the extent that it is not offset by benefits of public services. The actual amount a buyer will pay for a piece of property depends upon the net income it is expected to produce in relation to the yields available from other investments. If, for example, the net income from a plot of land is expected to be $1,200 a year indefinitely and if the prevailing yield on long-term assets is 6 percent, then the land will be worth $20,000. If a tax of $300 per year is imposed, then the net yield drops to $900, and the worth of the land falls to $15,000. The tax increase is said to have been capitalized. To the buyer of income-producing land, the tax in effect at the time of purchase will not be a burden thereafter, because the purchase price has already discounted the cost of the annual property tax. Given that land prices generally have gone up over time, it is fair to say that the property tax has not so much lowered land prices as it has served to retard their rise. The same type of analysis is commonly used to determine the effects of increases in property taxes imposed on existing housing and other property.
By comparison, the extent to which taxes on newly constructed houses and nonresidential buildings and other improvements will be borne by the taxpayer—the question of shifting and incidence—will involve a number of different factors. Much depends on whether the tax in question is levied by only one small jurisdiction, such as a county, city, or school district, or by all jurisdictions. If the tax is imposed by all jurisdictions, it is likely to be borne in the short run by owners of capital. If, however, the tax depresses savings, it may result in higher prices or lower wages in the long run (rather than burdening the owners of capital). See taxation.
The analysis of a tax imposed by all jurisdictions is more complex and more relevant for most policy purposes. The construction of buildings depends upon the willingness of investors to make capital available for them, and taxes affect that willingness. A property tax will be treated as a cost of doing business. It must generally be recovered in higher prices from consumers (or in lower prices paid to suppliers or lower wages paid to workers). Firms that do not succeed in passing the tax on to customers will suffer a lower rate of return on invested capital. Companies in competition with others located where rates are lower may be unable to shift the tax fully to consumers. The candidates most likely to bear the burden of the tax are owners of local land, labour that cannot (or will not) move in response to the tax, and especially local consumers. As output and prices adjust to changes in tax rates, the taxes tend to be shifted to consumers. The length of time it takes for a change in a property tax on buildings to be reflected in prices paid by consumers varies from a few months to a number of years. For regulated public utilities, the shifting of a change in tax will usually be more certain, but it requires some time because new rates will have to be authorized by an official agency.
Homeowners cannot shift the taxes on their dwellings. The price paid for the land, of course, will be used to adjust the tax that was in effect when the property was purchased (it is often the case that if the tax had been lower, the price paid for the land would have been higher). The tax on a house closely resembles a tax on other items of consumption, although in the United States it tends to be higher than the taxes levied on most other consumer goods. Deducting the property tax from gross income helps reduce the homeowner’s net burden by lowering the amount paid in individual income taxes.
The relative amounts of property tax borne by persons at different levels of income cannot be determined accurately. There is almost no way to take account adequately of the element represented by capitalized land tax in the price of land. Seen as a tax on all income from capital, the property tax on improvements is almost certainly progressive (placing a relatively larger burden on high-income households). But if one focuses on the burden of the tax levied by a single jurisdiction, the incidence of the tax is likely to fall on local consumers (and perhaps local workers and landowners), making the property tax regressive. The portion of property tax falling on local businesses is presumably shifted to consumers according to their purchases, including those of telephone, electric, and other utility services. Thus, in general, “single jurisdiction” property taxes can be seen as either roughly proportional to income or slightly regressive. One can, however, argue that the total redistributive effect from higher to lower income groups is substantial when considering the degree to which property taxes pay for schools and other services for low-income groups. The portion of property tax falling on businesses is presumably shifted to consumers according to their purchases, including those of telephone, electric, and other utility services.
There is widespread “horizontal inequity” in property taxes because of unequal assessments upon owners. The tax falls more heavily on some kinds of business (e.g., railroads and other utilities) and some types of consumption (e.g., housing) than on others. In the United States, property taxes on farming as a business tend, generally, to be low relative to the value of property but can also be high in relation to the income a farm produces. Because property taxation has such a long history, its many elements have worked themselves into the economy, with some portions being capitalized and others variously adjusted to, and the inequities have to some extent been reduced.
Taxation in the United States. The United States has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. In 2020, taxes collected by federal, state, and local governments ...
May 30, 2024 · 30%. 30%. 30%. Nonresident individuals in the U.S. are liable to pay income tax on their U.S.-sourced income. There are four filing categories for taxpayers: (1) single, (2) head of household, (3) married filing jointly, and (4) married filing separately. However, unmarried nonresidents are not allowed to file as heads of household.
Jun 25, 2024 · A property tax is an annual or semiannual charge levied by a local government and paid by the owners of real estate within its jurisdiction. Property tax is an ad-valorem tax, meaning the amount ...
- Julia Kagan
- 2 min
Aug 20, 2024 · The first looks at median property tax bills in each county in the United States, and the second compares effective property tax rates across states. Median property taxes paid vary widely across (and within) the 50 states. The average level of property taxes paid in 2022 across the United States was $1,815 (with a standard deviation of $1,388).
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Sep 1, 2023 · Here is a list of states in alphabetical order but includes the ranking position — 1 being the state with the lowest property tax rate and 51 (because the inclusion of D.C.) being the state with ...
