Property tax

Property tax, millage tax is an ad valorem tax that an owner of real estate or other property pays on the value of the property being taxed. There are three species or types of property: Land, Improvements to Land (immovable man made things), and Personalty (movable man made things). Real estate, real property or realty are all terms for the combination of land and improvements. The taxing authority requires and/or performs an appraisal of the monetary value of the property, and tax is assessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions.

There is a form of tax which is often confused with the property tax. This is the special assessment tax. These are two distinct forms of taxation: one (ad valorem tax) relying upon the fair market value of the property being taxed for justification, and the other, (special assessment) relying upon a special enhancement called a "benefit" for its justification.

The property tax rate is often given as a percentage (amount of tax per hundred currency units of property value). It may also be expressed as a permille (amount of tax per thousand currency units of property value), which is also known as a millage rate or mill levy. (A mill is also one-thousandth of a dollar.) To calculate the property tax, the authority will multiply the assessed value of the property by the mill rate and then divide by 1,000. For example, a property with an assessed value of US$ 50,000 located in a municipality with a mill rate of 20 mills would have a property tax bill of US$ 1,000.00 per year.[1]

Countries

Canada

Many provinces in Canada levy property tax on real estate based upon the current use and value of the land and this is the major source of revenue for most municipal governments in Canada. While property tax levels vary between municipalities in a province there is usually common property assessment or valuation criteria laid out in provincial legislation. There is a trend to use a market value standard for valuation purposes in most provinces with varying revaluation cycles. A number of provinces have established an annual reassessment cycle where market activity warrants while others have longer periods between valuation periods.

Hong Kong

In Hong Kong, there is a kind of tax named property tax, but it is not an ad valorem tax, it is to be classified into Income tax.

According to HK Inland Revenue Ordinance IRO s5B, all property owners shall not be subject to this tax, unless the HK property owner has received a consideration, the example is rental income for the year of assessment. The property tax shall be computed on the net assessable value at the standard rate.

Year of Assessment

The period of assessment is from April 1st to March 31st of the following year.

Net assessable value

The formula is:

Net assessable value = Eighty percent of Assessable value.

HK property tax payable = Net assessment value X Property tax standard rate

Assessable value = Rental income + Premium + (Rental bad debt recovered - Irrecoverable rent) - Rates paid by owner.

See also

• CAP 112 Inland Revenue Ordinance Section 5B - Charge of property tax
• HK Inland Revenue Department: Departmental Interpretation and Practice Notes, DIPN 14

Jamaica

This tax is paid on in just the same way as would mortgage. It is an annual payment depending on the value of your assets, such as one's property.

Netherlands

Property tax (Dutch: Onroerend goed belasting or Onroerende zaak belasting (OZB) ) is levied on homes on a municipal basis in two parts: for the one who lives in the house and one for the owner of the house. When one has a rental home, he/she should only pay the living part of the tax. The last years lots of concern are because of the annual raise of this tax by more than 10% in some municipalities. As of 2005, there is a Parliament proposal to retain only the owner's part of the property tax and to raise it annually not more than the inflation rate.

United Kingdom

There is currently no ad valorem tax on residential property. Two former systems were dropped because of their extreme unpopularity. They were

• Schedule A income tax, a central government tax that was levied on the imputed rent, that is the rent that owner-occupiers of land would have been receiving from a tenant had they not been living in the houses they owned. However, actual (as opposed to imputed) rent is still subject to income tax under Schedule A;

• Rates, a local government tax that was levied in proportion to the assessed value of property. This was replaced under the Thatcher government by a poll tax, which proved even more unpopular than the rates, and was replaced by a mixed council tax which combines elements of property tax and a poll tax. Rates are still (2006) levied on business property, though some classes of business are exempt.

United States

In the United States, property tax on real estate is usually assessed by local government, at the municipal or county level. A very important benefit of a tax on property over a tax on income is that the revenue always equals the tax levy, unlike income or sales taxes, which can result in shortfalls producing deficits. The property tax always produces the required revenue for municipalities' tax levies. On the other hand property taxes can have a negative impact on individuals with fixed incomes such as the elderly and those who have lost their jobs. Gentrification in low income areas of a city can drive property taxes to the point where long time residents of an area are forced to leave.

The assessment is made up of two components — the improvement or building value and the land or site value. In some states, personal property is also taxed. A tax assessor is a public official who determines the value of real property for the purpose of apportioning the tax levy. An appraiser may work for government or private industry and may determine the value of real property for any purpose.

Tax assessor offices maintain inventory information about improvements to real estate. They also create and maintain tax maps. This is accomplished with the help of surveyors. On tax maps, individual properties are shown and given unique parcel identifiers. The tax maps help to ensure that no properties are omitted from the tax rolls and that no properties are taxed more than once. Real property taxes are usually collected by an official other than the assessor. Duplicate examples of a proposed alternate to ad valorum assessments is provided at the following sites as sponsored by the The Henry George Foundation. Maryland, King County, Washington, Indiana, New Jersey, New York. In fact many localities have gone "online".

The assessment of an individual piece of real estate may be according to one or more of the normally accepted methods of valuation (ie income approach, market value or replacement cost). Assessments may be given at 100 percent of value or at some lesser percentage. In most if not all assessment jurisdictions, the determination of value made by the assessor is subject to some sort of administrative or judicial review, if the appeal is instituted by the property owner.

Ad Valorem (of value) property taxes are based on fair market property values of individual estates. A local tax assessor then applies an established assessment rate to the fair market value. By multiplying the tax rate x the assessed value of the property, a tax due is calculated. These taxes are collected by municipalities such as cities, counties, and districts in many locations in the United States. They fund municipal budgets for school systems, sewers, parks, libraries, fire stations, hospitals, etc.

After determining a budget at the municipal level, a legislative appropriation determines how the monies will be collected and distributed. After that, a tax authority levies the tax. An appeal is permitted. Equalization is then considered by a board of equalizers to assure fair treatment. Then a tax rate is determined by dividing the municipal budget by the assessment role of that municipality. Your tax rate x the assessed value of your property determines the tax you owe.

Some jurisdictions have both ad valorem and non-ad valorem property taxes, the latter representing a fixed charge (regardless of value) for items such as street lighting and storm sewer control.

In the US, another form of property tax is the personal property tax, which can target

• automobiles, boats, aircraft and other vehicles;
• other durable goods (though typically household goods and personal effects are exempt);
• inventory;
• intangible assets such as stocks and bonds.

In some states, it is permissible to separate the real estate tax, into two separate taxes — one the land value and one on the building value. See Land Value Taxation

Personal property taxes can be assessed at almost any level of government, though they are perhaps most commonly assessed by states.

Effects

Sprawl

In the absence of comprehensive urban planning policies, property tax on real estate changes the incentives for developing land, which in turn affects land use patterns. One of the main concerns is whether or not it encourages urban sprawl.

The market value of undeveloped real estate reflects a property's current use as well as its development potential. As a city expands, relatively cheap and undeveloped lands (such as farms, ranches, private conservation parks, etc.) increase in value as neighboring areas are developed into retail, industrial, or residential units. This raises the land value, which increases the property tax that must be paid on agricultural land, but does not increase the amount of revenue per land area available to the owner. This, along with a higher sale price, increases the incentive to rent or sell agricultural land to developers. On the other hand, a property owner who develops a parcel must thereafter pay a higher tax, based on the value of the improvements. This makes the development less attractive than it would otherwise be. Overall, these effects result in lower density development, which tends to increase sprawl.

Attempts to reduce the impact of property taxes on sprawl include:

• Land value taxation - This method separates the value of a given property into its actual components - land value and improvement value. A gradually lower and lower tax is levied on the improvement value and a higher tax is levied on the land value to insure revenue-neutrality. This method is also known as two-tiered or split-rate taxation.

Most cities have a higher building tax than surrounding suburban and rural areas. By removing improvements as a factor in the property taxes, the penalty against construction and renovation in already urbanized areas is removed. Increasing the tax on land value discourages land speculation - which forces development further away from central cities - and encourages efficient land use.

• Current-use valuation - This method assesses the value of a given property based only upon its current use. Much like land value taxation, this reduces the effect of city encroachment.
• Conservation easements - The property owner adds a restriction to the property prohibiting future development. This effectively removes the development potential as a factor in the property taxes.
• Exemptions - Exempting favored classes of real estate (such as farms, ranches, cemeteries or private conservation parks) from the property tax altogether or assesing their value at a very minimal amount (for example, $1 per acre).
• Forcing higher density housing - In the Portland, Oregon area (for example), local municipalities are often forced to accept higher density housing with small lot sizes. This is governed by a multi-county development control board, in Portland's case Metro.
• Urban growth boundary or Green belt - Government declares some land undevelopable until a date in the future. This forces regional development back into the urban core, increasing density but also land and housing prices. It may also cause development to skip over the restricted-use zone, to occur in more distant areas, or to move to other cities.

Distributional

Property tax has been thought to be regressive (that is, to fall disproportionately on those of lower income) when not correctly implemented because of its impact on particular low-income/high-asset groups such as pensioners and farmers in drought years. Because these persons have high-assets accumulated over time, they have a high property tax liability, although their realized income is low. Therefore, a larger proportion of their income goes to paying the tax. In areas with speculative land appreciation (such as California in the 1970s and 2000s), there may be little or no relationship between property taxes and a homeowner's ability to pay them short of selling the property.[2] This issue was a common argument used by supporters of such measures as California Proposition 13 or Oregon Ballot Measure 5; some economists have even called for the abolition of property taxes altogether, to be replaced by income taxes, consumption taxes such as Europe's VAT, or a combination of both. Others, however, have argued that property taxes are broadly progressive, since people of higher incomes are disproportionately likely to own property. These two points of view are not incompatible - it is possible for a tax to be progressive in general but to be regressive in relation to minority groups. However, although not direct, and not likely one-to-one, property renters are subject to property taxes as well. The owner's cost of taxation is passed on to the renter (occupant).

Progressive policies

As property increases in value the possibility exists that new buyers might pay taxes on outdated values thus placing an unfair burden on the rest of the property owners. To correct this imbalance municipalities periodically revalue property. Revaluation produces an up to date value to be used in determination of the tax rate necessary to produce the required tax levy.

A consequence of this is that existing owners are reassesed as well as new owners and thus are required to pay taxes on property the value of which is determined by market forces. In an effort to relieve the frequently large tax burdens on existing owners communities have introduced exemptions.

In some states, laws provide for exemptions (typically called homestead exemptions) and/or limits on the percentage increase in tax, which limit the yearly increase in property tax so that owner-occupants are not "taxed out of their homes". Generally, these exemptions and ceilings are available only to property owners who use their property as their principal residence. Homestead exemptions generally cannot be claimed on investment properties and second homes. When a homesteaded property changes ownership, the property tax often rises sharply and the property's sale price may become the basis for new exemptions and limits available to the new owner-occupant.

Homestead exemptions increase the complexity of property tax collection and sometimes provide an easy opportunity for people who own several properties to benefit from tax credits to which they are not entitled. Since there is no national database that links home ownership with Social Security numbers, landlords sometimes gain homestead tax credits by claiming multiple properties in different states, and even their own state, as their "principal residence", while only one property is truly their residence.[3] In 2005, several US Senators and Congressmen were found to have erroneously claimed "second homes" in the greater Washington, D.C. area as their "principal residences", giving them property tax credits to which they were not entitled.[4][5]

Undeserved homestead exemption credits became so ubiquitous in the state of Maryland that a law was passed in the 2007 legislative session to require validation of principal residence status through the use of a social security number matching system.[6] The bill passed unanimously in the Maryland House of Delegates and Senate and was signed into law by the Governor.

The fairness of property tax collection and distribution is a hotly-debated topic. Some people feel school systems would be more uniform if the taxes were collected and distributed at a state level, thereby equalising the funding of school districts. Others are reluctant to have a higher level of government determine the rates and allocations, preferring to leave the decisions to government levels "closer to the people".

In Rhode Island efforts are being made to modify revaluation practices to preserve the major benefit of property taxation, the reliability of tax revenue, while providing for what some view as a correction of the unfair distribution of tax burdens on existing owners of property.[7]

The Supreme Court has held that Congress cannot directly tax land ownership, unless the tax is apportioned among the states based upon representation/population. In an apportioned land tax, each state would have its own rate of taxation sufficient to raise it pro-rata share of the total revenue to be financed by a land tax. Such an apportioned tax on land had been used on many occasions up through the Civil War.

Indirect taxes on the transfer of land are permitted without apportionment: in the past, this has taken the form of requiring revenue stamps to be affixed to deeds and mortgages, but these are no longer required by federal law. Under the Internal Revenue Code, the government realizes a substantial amount of revenue from income taxes on capital gains from the sale of land, and in estate taxes from the passage of property (including land) upon the death of its owner.

The Supreme Court has not directly ruled on the question of whether Congress may impose an unapportioned tax on the "privilege" of owning land with the "measure" of the tax being the value of the land.

Development case study: New Orleans

Before the American Civil War, New Orleans was one of the largest cities in the United States, with a population of over 100,000. The federal government was funded by import and export duties and the states and local governments were funded by property taxes.

New Orleans was sensitive to property taxes. To make the job of the assessors easier, the assessors adopted a rule that said that property taxes were proportional to the front footage of the lot, that is, the length of the lot along its street. The depth of lots was fairly consistent due to the streets' fairly consistent layout. The rule was thus relatively accurate since land, not the structure, represented the value of the property.

To minimize property tax, lots were narrow but deep. As a result, houses were similarly narrow but deep. This is a striking difference from the contemporary ranch-style homes. The New Orleans house of that time became known as a shotgun house because it was said that you could stand in the front door and shoot a shotgun all the way through to the rear wall without hitting anything within. Hallways were avoided because they took up valuable room width inside the house.

The shotgun double became popular then. A shotgun double was two residences under one roof and the building was two rooms wide, instead of the shotgun’s single room width. The double has two front doors and the two residences share a common set of center chimneys. Each room had a fireplace for heat. This style saved the narrow alleys between each house that lead to the back yard as well as the construction cost of the multiple chimneys.

Citizens of New Orleans complained that their neighbor with a two-story house paid the same property tax as that paid by the owner of a one-story house. The assessors changed their rule to one that determined property taxes under a formula: the front footage times the number of stories the house had.

As a result of that rule change, the camelback house was born. A camelback house has a hump at the back; it was two stories tall in the back but only one in the front. In response, the assessors made a new rule that determined how far back the hump began before the house was determined to be a two story house.

Nevertheless, the property owners complained that the much grander camelback down the street paid the same tax as the single story house. In exasperation, the assessors made an entirely new rule: the tax would be based on the number of rooms within the house.

To the extent that anyone considered it previously, closets became totally unrealistic. A closet was counted as a room because a closet is an enclosed space with a door. So instead of closets, home owners used furniture to store clothes - the chiffarobe was born.

So, the New Orleans house is narrow and deep. It has no closets or hallways but every room has a fire place. City water and sewerage was added later so all the rooms that require this are at the back of the house at the site of the back porch.

See also

• Land value tax
• Mill levy
• Proposition 2½, the property tax and auto excise tax limitation law in Massachusetts.

External links

• Urban Sprawl and the Property Tax
• Neutral Property Taxation
• The Property Tax as a Tax on Value: Deadweight Loss
• The Local Property Tax Literature: 100 Years of Disagreement
• Property Tax Section of Taxation World
• IPT Programs
• History of Property Taxes in the United States
• HindSite provides a historical overview of state and local fiscal politics in the U.S., with a focus on property taxation.
• [8] Guardian Newspaper article on property taxes with example from Denmark.
• [9] Provides good information re the taxation of real estate in Illinois

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