Understanding Your Property Tax
A property tax is a tax levied on the value of property and hence on accumulated capital. There are many problems peculiar to property taxation. In the first place, the tax depends on an assessment of the value of property, and the rate of tax is applied to this assessed value. But since an actual sale of property has usually not taken place, there is no way for assessments to be made accurately. Since all assessments are arbitrary, the road is open for favoritism, collusion, and bribery in making them. Another weakness of current property taxation is that it taxes doubly both real and intangible property. The property tax adds real and intangible One peculiarity of the property tax is that it attaches to the property itself rather than to the person who owns it. As a result, the tax is shifted on the market in a special way known as tax capitalization. Suppose, for example, that the social time-preference rate, or pure rate of interest, is 5 . 5 is earned on all investments in...
Property tax capitalization (H2, R2) An effect on house values of a property tax. Full capitalization occurs when differences in house prices are equal to the present value of variations in expected tax liabilities, after taking into account housing characteristics such as structure, neighbourhood and public services. Oates, W.E. (1969) 'The effects of property taxes and local public spending on property values an empirical study of tax capitalization and the Tiebout hypothesis', Journal of Political Economy 77 457-71.
Many property taxes are borne by the property owner because there is no other party to whom they can be shifted. This is typically true for taxes on land, personal property, and owner-occupied residences. Even when land is sold, the property tax is not likely to be shifted. The buyer understands that future taxes will have to be paid on it, and this expected taxation will be reflected in the price the buyer is willing to offer for the land. Taxes on rented and business property are a different story. Taxes on rented property can be, and usually are, shifted wholly or in part from the owner to the tenant by the process of boosting the rent. Business property taxes are treated as a business cost and are taken into account in establishing product price hence, such taxes are ordinarily shifted to the firm's customers.
An important part of utility rate theory has been developed out of the fixed-variable classification of costs. In addition to investment costs which already have been mentioned, utility fixed costs include such items as property taxes, insurance, non-operating depreciation, basic maintenance, salaries of officials, and wages of the minimum staff of employees. If the utility is to be in a position to render service when needed by its customers, it must incur these fixed expenses. 5Within the Limits of ranges of output and periods of time previously mentioned. Also, accounting treatment of investment costs may cause annual booked costs to vary as depreciation changes the spread between gross and net plant return requirements may change, as may property taxes, etc. But investment costs must be met in any event.
Before proceeding, note that equal sharing of the tax burden is unusual. Typically, we are looking at financing by means of income, sales, or property taxes. With income taxes, for example, if all taxpayers have the same income, there is equal financing. However, incomes usually differ and total income taxes paid rise with income, so individual tax prices will also rise with income. That is, if you have more than average income, you pay more than average taxes and more than average tax price. Despite this relative difference, the analysis of the voting process is carried out exactly in the same fashion whether financing is equal or not. Only the exact level of public services chosen will differ according to the method of financing.
These costs include interest expenses, rent on leased plant and equipment, depreciation charges associated with the passage of time, property taxes, and salaries for employees not laid off during periods of reduced activity. Because all costs are variable in the long run, long-run fixed costs always equal zero. Variable costs fluctuate with output. Expenses for raw materials, depreciation associated with the use of equipment, the variable portion of utility charges, some labor costs, and sales commissions are all examples of variable expenses. In the short run, both variable and fixed costs are often incurred. In the long run, all costs are variable.
Balances, which escape property taxation. It would avoid many difficulties of a property tax, such as double taxation of real and tangible property and the inclusion of debts as property. However, it would still face the impossibility of accurately assessing property values. It is clear that the wealth tax levies a heavy penalty on accumulated wealth and that therefore the effect of the tax will be to slash accumulated capital. No quicker route could be found to promote capital consumption and general impoverishment than to penalize the accumulation of capital. Only our heritage of accumulated capital differentiates our civilization and living standards from those of primitive man, and a tax on wealth would speedily work to eliminate this difference. The fact that a wealth tax could not be capitalized means that the market could p. 118 not, as in the case of the property tax, reduce and cushion its effect after the impact of the initial blow.
Percent in 1993 to 0.4 percent in 1997, the state and local share fell by about half, from 16.9 percent to 8.4 percent. Not counted here is the considerable value of the indirect subsidy museums receive from local government because their land and buildings, like those of other nonprofit institutions, are exempt from the local property tax.
Can any general conclusions be reached about the structure of the overall tax system For the economy as a whole, the net effect of the federal, state, and local taxes on income distribution is not substantial. If one accepts the arguments that the corporation and property taxes are progressive, the incidence of taxes overall is slightly progressive. Under other assumptions, the incidence of all taxes combined is roughly proportional but regressive for the very poor and the very rich (Winfrey, 1998, p. 61).
Support from local government was another matter. When arts institutions such as museums or symphony orchestras were first established in the latter part of the nineteenth century, the local government often helped out by donating land on which the museum or concert hall could be built by its rich patrons. When the City Beautiful movement began around 1900, many cities built so-called civic centers that typically included a large auditorium usable for concerts and perhaps operas. In addition, local governments have always exempted religious, educational, and other nonprofit organizations from liability for the local property tax. This amounts to a substantial benefit In 1978, Dick Netzer estimated its value to the arts sector as 150 million at most. 3 At current prices it would be worth several times that figure. Tax exemption of any kind is usually referred to as a form of indirect support.
Table 12.1 reveals a wide range in the level of direct support per capita. Finland tops the list, spending 111.67. Germany is a strong second at 89.52, while the United States ranks last, spending only 5.85 per person. The exclusion of indirect aid makes governmental support in the United States look much less generous than in fact it is. Direct support consists of cash grants or payments. Indirect support occurs when a government forgoes potential tax revenue through some provision favorable to arts institutions. Examples in the United States are the exemption of arts institutions from the local property tax and, even more important, provisions in the federal and state tax codes that create an incentive for taxpayers to make charitable contributions to nonprofit arts organizations. In both cases the foregone revenue is equivalent to an expenditure by government. Indeed, in the United States the sums lost through such provisions have been called tax expenditures.
This chapter provides historical perspective by examining the relationship between entrepreneurial activity and wealth inequality in nineteenth-century Massachusetts. We make use of a unique data set that links information from the federal censuses to property tax records. The data allow us not only to examine the concentration of wealthholdings among entrepreneurs in an earlier period but also to examine the relationship among entrepreneurial activity, economic growth, and changes in the distribution of wealth. During the nineteenth century, Massachusetts experienced rapid industrialization,
In the United States, one of the most important investments a family can make in its children's future is to buy a house in a good school district. As a general rule, the quality of a neighborhood school is strongly correlated with the average price of houses in the neighborhood. This is true in part because local property taxes are a major source of school funding. But because of the importance of peer effects in the classroom, the better schools tend to be located in more expensive neighborhoods even in countries in which school budgets are independent of local property taxes. Yet no matter how much every family spends on housing, the inescapable mathematical logic of musical chairs ensures that half of all children will attend schools in the bottom half of the school quality distribution.
Property Taxes The second largest source of revenue for local governments is the property tax-a tax on tangible and intangible possessions such as real estate, buildings, furniture, automobiles, farm animals, stocks, bonds, and bank accounts. The property tax that raises the most revenue is the tax on real estate. Taxes on other personal property, with the exception of automobiles, is seldom collected because of the problem of valuation. For example, how would the tax assessor-the person who assigns value to property for tax 2. Key Terms Define intergovernmental revenue, property tax, tax assessor, payroll withholding statement.
Intergovernmental revenue, property tax, tax assessor, payroll withholding statement State and local governments, like the federal government, raise revenue in many ways. They receive funds from sales taxes, property taxes, utility revenues, and through other methods. Sometimes, as we saw in the cover story, they even tax us when we die.
Since the 1930s the federal government has been furnishing financial assistance for the construction and expansion of airports. Since 1970 the funds for this purpose have come from a trust fund made up of the proceeds from sources such as taxes on passenger tickets, on air freight charges, on fuel, and on each international passenger departure. The money to construct and expand airports, however, comes from many other sources. The local governmental units (state, county, and city) may put up some of it out of general tax revenues. Sometimes the airport is initially surplus military property given or leased for a nominal consideration to the local government. Thus, it may be said that the original capital costs of many airports have been furnished by local or federal taxpayers. Moreover, the localities may be said to be subsidizing the airport indirectly through exemption from the usual local real estate property taxes, while the federal taxpayers indirectly assist through the income...
These expenses include depreciation and plant indirect expenses such as property taxes, insurance, fire protection. All these items are expressed as a fraction of the equipment cost or the fixed capital investment. The fixed capital investment represents the total money spent to purchase equipment and place it in operation. It is customary to include the return on investment on an after-tax basis using the federal rate but occasionally state and local taxes may also be included in the expression for the fixed expenses. Table 13.3 is a checklist of these items. To simplify the mathematics, annual expenses are considered to be constant, therefore depreciation is calculated on a straight-line basis.
Consider a politically organized municipality that has long operated under a constitution that specifies simple majority voting as the rule for making budgetary choices. Spending and taxing decisions are made in town meetings. (This simplest of models is used here to avoid unnecessary complexities that are introduced by representation.) Assume that a proposal is made to finance a new auditorium through an increase in the general property-tax rate. The proposal secures a majority in the assembly, and it is adopted. Each person who opposed the measure will, however, experience an opportunity loss consequent on the political action taken, a loss by comparison with his own individually preferred outcome. To these disappointed members of the losing minority coalition, the budget is too large, but observed voting behavior suggests that a proposal for reversal cannot carry the day. Members of this losing coalition, singly and in groups, will be motivated to search out and to propose other...
These tax expenditures reduce the income tax base. A few of the larger items and estimated amounts of revenue loss for 2002 include deductibility of mortgage interest on owner-occupied homes ( 63.6 billion), deductibility of state and local property tax on owner-occupied homes ( 21.8 billion), child credit ( 22.2 billion), deductibility of charitable contributions ( 30.9 billion), and exclusion of pension contributions and earnings ( 129.0 billion) (U.S. Office of Management and Budget, 2003). Some of the deductions are for equity purposes, for expenses beyond an individual's control, such as medical expenses. Others allow deductions for expenses that are related to earning income, such as reimbursement for job-related activities. There are also a number of deductions that are the result of public policies to encourage specific behaviors, such as charitable contributions (Mikesell, 2003).
Britain's official statisticians now call the basic output measure of gdp gross value added (gva) at basic prices . This includes subsidies and excludes taxes (such as vat) on products only. gva or gdp at factor cost also excludes taxes on production, such as business property taxes. The statisticians consider gva at basic prices to be a better measure of short-term movements in the economy than the old factor-cost measure.
We cannot be quite as lenient concerning his indirect costs, i.e., those costs which are joint or common to all of his products, such as lighting of the bakery, heat for the ovens (which are likely to bake several products at the same time), wages of bakers and sales personnel, etc., as well as other overhead costs such as the cost of plant (depreciation, interest on borrowed funds, and return on the equity investment together with associated income taxes), property taxes, and our baker-entrepreneur's own salary. (Here we again introduce important terms indirect costs, namely those costs arising from the joint or common production of several products, often referred to interchangeably in a non-technical sense as indirect, joint, common, or overhead costs. These are costs which cannot be assigned to a single product because they are incurred in the production of multiple products.)8
Property taxes are another form of taxation that is often, albeit not always, referred to as a benefits tax when combined with local zoning ordinances (Hamilton, 1975 Fischel, 1992 Mieszkowski and Zodrow, 1989). Local jurisdictions utilize property taxes to signal citizens the cost of goods and services provided by the jurisdiction. The higher the tax rate, the more expansive the services provided by a jurisdiction. This is referred to as the Tiebout Model (Tiebout, 1956), and under this model, citizens select into the jurisdiction whose mix of services and tax rates best meets their preferences. Citizens desiring extended services will select into communities with higher tax rates, and citizens who prefer lower taxes will select communities with minimal services.
Principal aim of this charge was to encourage the adult population to bring pressure upon their local governments to moderate their expenditure by increasing the number paying local taxation it was hoped there would be more opposition to local government overspending. Critics opposed its high collection cost and regressive nature (only giving rebates to the very poor). Also it was argued that a community charge should only be used to finance public goods. In 1991, it was decided to replace it with a modified property tax, the council tax.
UK local property tax introduced in 1991 as a replacement of the community charge. poorest households are exempted from it other households are assessed on the assumption that two adults live in the household (a single person would have a rebate of 25 per cent). The value of each property is placed within one of seven bands, which are defined differently for England, Scotland and Wales.
Medium's utility as related to the level of public services. The maximum point is at B with gM, his most desired level of public services. Based on the analysis in Figure 3.2 of what happens to Mr. Medium's well-being as we increase or decrease public services relative to gM, Figure 3.3 shows a continuous decline in utility as we move in either direction from gM. In this case, preferences are single-peaked. If individuals do not have single-peaked preferences, there may be no dominant voting outcome, as we will see later. With typical tax systems, such as income, sales, or property taxes, preferences on such issues as a school budget's size will be single peaked, and we can readily apply our voting model.
Fiscal federalism (H7) The system of sharing tax revenues and public expenditure commitments between a central government and state governments. By making grants to lower levels of government, a national government can determine the standard of provision of public services, especially education. Different levels of government can be financed by different types of tax, e.g. an income tax for the national level but sales and property taxes for the state and local levels, or by the different governments of a country sharing in the revenues from the same range of taxes.
The earlier empirical studies focussed upon property taxes, public good provision and house prices. The reason for this was made clear by Oates who initiated this line of research in 1969 local governments fund their activities primarily through property taxes and the manner in which these taxes are reflected in house prices provides evidence on the Tiebout hypothesis. Assume that all local governments provide the same level of public goods. Then the jurisdictions with higher property tax rates will be less attractive and have lower house prices. Now let the provision of public goods vary. Holding tax rates constant, house prices should be higher in areas with more public good provision. These effects offset each other, and if the public good effect is sufficiently strong jurisdictions with higher tax rates will actually have higher property prices. Oates considered evidence on house prices, property tax rates and educational provision for 53 primarily residential municipalities in...
Local government finance (H7) The financing of the government of a region, city or district by local taxation, charges and grants from central government. At the local level property taxes, local sales taxes and local income taxes are the principal forms of taxation used. In order to maintain the same standards of service throughout a country, a national government often provides grants to cover part of local costs, e.g. educational expenditures. Major problems arise if the local revenue is too small to meet local needs, e.g. if there is a large non-resident population, as in New York city or Glasgow, using facilities without paying full local taxes. Also, if there is not a clear separation of powers between the levels of government, a local government might pursue macroeconomic policies, e.g. employment policies, which are too expensive for it to finance, as has happened in the UK. Although property taxes are often a major source of local revenue and provide an additional tax base,...
Three major categories of taxes are used in the U.S. income, sales and excise, and property taxes. Each of these taxes is a different form of affluence. Taxes on income apply to the amounts of different types of income earned during the defined tax period. Taxes on wealth apply to accumulated value regardless of the time period real property is considered wealth, for example. Consumption taxes apply to purchasing transactions, such as retail sales (Lee and Johnson, 1998, pp. 59-60). Every major type of government uses taxes, but a great deal of variety exists across governments in the type of taxes used and the reliance on one versus another type of tax. In addition, as will be discussed later, the base against which a given tax is applied varies widely across governments for example, the list of goods and services included in the retail sales tax is different in each state. State governments, as seen in Table 7.2, are very different from the federal government in use of taxes. In...
In addition, the costs of collecting the tax need to be considered. Tax administration and enforcement efforts can be expensive. Real property taxes, for example, require governments to hire assessors to determine the value of the property, and to calculate and send out individual tax bills. Part of the cost to government is in enforcing the tax laws. People have found ways to evade payments of imposed taxes throughout the history of civilization this is considered by some to be a major cause of the decline of the Roman Empire, for example (Adams, 1999). Taxpayers also incur costs for such things as record keeping and hiring accountants and lawyers. In fact, taxpayer costs have been estimated to be at least five times greater than the collection costs to government (Stiglitz, 2000).
An ability to pay approach, on the other hand, is based on a belief that those who are better able to pay for government goods and services should bear more of the weight of the taxes. One might then want to ensure that horizontal equity and vertical equity in the structure of the tax are present. With horizontal equity, people in the same position would be treated similarly for example, two families living next door to each other in perfectly comparable houses would pay the same amount of property tax. With vertical equity, individuals in different situations are treated dissimilarly. Since a dollar means less to wealthy persons than poor persons, equalizing burdens requires that more dollars be taken from the former than the latter (Winfrey, 1998, p. 66). Again, though, this sounds more straightforward than it is in practice. A household with 100,000 income presumably should pay more tax than a household with 50,000 income. Should the payment by the higher-income household be twice...
Tax systems have changed dramatically over time in this country. As noted earlier, the individual income tax at the federal level did not affect most Americans until after World War II. States received over one-half of their tax revenues from the property tax at the beginning of the 1900s (Bartle, 2001), with no use of a general sales tax or income tax that pattern has completely reversed, with property tax constituting about 2 of state tax revenues. Local governments still rely heavily on the property tax, but its use has declined, and other taxes now comprise 27 of total local taxes. There is a continued effort at diversification of revenue sources some of this involves shifts away from taxes to sources such as user One issue has been the court cases and concerns regarding school funding equity. As discussed earlier, heavy reliance on the property tax to fund elementary and secondary education has resulted in large spending variations across school districts within a state due to...
A focus on economic development in recent decades has led to high levels of competition among state and local governments. These efforts to attract and retain businesses have affected tax systems. States have instituted tax policies to give breaks of various sorts, such as tax credits for capital investment or increased jobs. Local governments also have some tools available for these purposes, such as property tax abatements and tax increment financing for development projects (Mikesell, 2003). In recent years, an emphasis has been placed on targeting these incentives towards specific types of businesses for example, states are trying to attract
Local governments are also suffering. In some respects, diversification of revenue sources may have hurt these governments, however, rather than helped. For example, property tax has historically been a more stable source that is less dependent on the economy than are income and sales tax. Governments that have increased reliance on sales or income tax in recent decades may have more difficulty coping with this downturn. In addition, states have partially dealt with their own problems by reducing aid to local governments.
Income tax and general sales taxes were not even in use in this country a century ago. Today, it is difficult to imagine life without these major taxes, along with the third leg of the tax stool, the property tax. Each of these has undergone significant changes in recent decades, from the types of government that use the tax to the base that is taxed. The property tax has come under increasing attack, resulting in decreased use relative to other taxes, but it remains the primary tax for local governments. Sales tax is also under some pressure. While it is more popular with the public than other taxes are, and its usage by state and local governments has increased, the sales tax base is shrinking due to the movement towards a service economy that is largely untaxed and the increase in currently untaxable Internet purchases. The income tax has undergone significant changes since the 1980s also, particularly at the federal level where the highest tax rates have been reduced and increased...
Regressive nature of many poll taxes has often led to them being criticized. in the UsA, poll taxes have been used by state and local governments. Until the 24th Amendment of the Us constitution of 1964 outlawed it, the payment of a poll tax was required of voters in some southern states, thus excluding the poor, many of whom were black. In the UK, a 'community charge' which has some of the characteristics of a poll tax was introduced in 1989-90 to replace 'rates', the local property tax.
Rate support grant (H7) An expenditure subsidy previously paid by the UK government to local authorities which resulted in less having to be raised by rates (local property tax). This grant on average was equal to about one-half of total local government expenditure. central government, in order to ensure that minimum standards of services, e.g. in education, are maintained, has to provide this subsidy. After the domestic rates were replaced by the community charge, the rate support grant was replaced by a revenue SUPPORT GRANT.
Property Taxes Most economists conclude that property taxes on buildings are regressive for the same reasons as are sales taxes. First, property owners add the tax to the rents that tenants are charged. Second, property taxes, as a percentage of income, are higher for low-income families than for high-income families because the poor must spend a larger proportion of their incomes for housing. This alleged regressivity of property taxes may be increased by differences in property-tax rates from municipality to municipality. In general, property-tax rates are higher in poorer areas to make up for lower property values.
Sales taxes normally are shifted to consumers personal income taxes are not shifted. Specific excise taxes may or may not be shifted to consumers, depending on the elasticities of demand and supply. Disagreement exists as to whether corporate income taxes are shifted. Property taxes on owner-occupied property are borne by the owner those on rental property are borne by tenants.
Our data set links data from the federal censuses of 1820 to 1910 to data in the property tax records of Massachusetts.2 After a survey of the available tax records, samples were taken from localities that had a complete set of records for the period 1820-1910 Boston, Salem, Lexington, Westminster, and Sturbridge. In each census year approximately 1,200 households, equally divided between the urban and rural areas, were randomly chosen from the census manuscript schedules.3 These linked data provide a valuable new tool for measuring and analyzing long-term trends in wealth inequality. Real and personal property taxes formed the backbone of state and local tax revenues until income and sales taxes were introduced in the twentieth century. According to Richard T. Ely (1888, p. 131), the antebellum period wit The taxable wealth'' data obtained from property tax records is clearly distinct from the wealth concepts used in studies of the wealth distribution in the current period. First,...
That which is taxed, especially income, wealth, property, expenditure or consumption. A government can raise its total tax revenue by using several tax bases. if the country has a federal structure, then a different tax base can be used for each level of government. originally little was taxed because of problems of valuation and collection gradually, there has been a movement from indirect taxes on imports and various types of consumption to iNcome tax and property tax.
Tax mimicking A substantial body of empirical studies has emerged testing for interdependence among jurisdictions in tax and expenditure choices. One of the first and very influential work is by Case et al. (1993) who test a model in which state's expenditure may generate spillovers to nearby states. The great novelty of this work is to allow for spatially correlated shocks as well as spillovers. Using data from a group of states, strong evidence of fiscal interdependence emerges and the effects arising from interdependence are large. A dollar increase in spending in one state induces neighboring states to increase their own spending by seventy cents. Brueckner and Saavedra (2001) test for the presence of strategic competition among local governments using data of 70 cities in the Boston metropolitan area. Taking capital as the mobile factor and population as fixed, local jurisdictions choose property tax rates taking into account the mobility of capital in response to tax...
In the development and management of transportation infrastructure, inefficient arrangements exist that do not make the best use of government revenue, travelers' time, and environmental capacity. User fees are possible in all cases, and although they do present difficulties in terms of administrative costs and political acceptability, these problems are not as serious as they once were. Further, as a result of the public's resistance to increased property taxes or further adoption of local nonproperty taxes, user fees might now be the path of least resistance.
Certain expenses are always present in an industrial plant whether or not the manufacturing process is in operation. Costs that are invariant with the amount of production are designated as fixed costs or fixed charges. These include costs for depreciation, local property taxes, insurance, and rent. Expenses of this type are a direct function of the capital investment. As a rough approximation, these j charges amount to about 10 to 20 percent of the total product cost. The magnitude of local property taxes depends on the particular locality of the plant and the regional laws. Annual property taxes for plants in highly populated areas are ordinarily in the range of 2 to 4 percent of the fixed-capital investment. In less populated areas, local property taxes are about 1 to 2 percent of the tied-capital investment.
Taxes may be classified into three types (1) property taxes, (2) excise taxes, and (3) income taxes. These taxes may be levied by the Federal government, state governments, or local governments. Property Taxes Local governments usually have jurisdiction over property taxes, which are commonly charged on a county basis. In addition to these, individual cities and towns may have special property taxes for industrial concerns located within the city limits. Property taxes vary widely from one locality to another, but the average annual amount of these charges is 1 to 4 percent of the assessed valuation. Taxes of this type are referred to as direct since they must be paid directly by the particular concern and cannot be passed on as such to the consumer.
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