Public Finance, Foldvary

Anderson, 17, Property taxes

Property taxes are ad valorem on property, usually real estate and vehicles.

Real and personal property.

Can tax a flow or a stock.

Based on value, a stock.

But it is the present value of the rental flow.

The price of land is the capitalized rent: p = r / (i+t)

The fraction of rent taxed is then f = t / (i+t)

Most states have classified property tax system, with different tax rates for different uses,

such as timber and golf courses.

Churches and non-profit colleges are exempt from property taxes.

There are often deferments for the elderly, and “circuit breaker” mechanisms to limit increases.

The official who estimates the property value of real estate is called the assessor, and the process

is called assessment.

Assessment is done by the counties.

An owner may appeal the assessment to an appeal board or a court.

Assessment estimates the value of property, like appraisal in the private sector.

Based on highest and best use.

Assessors separate the land value and the building value.

PROPERTY TAX RULES are in Title 18, Public Revenues, California Code of Regulations

Prior to 1912, the state derived up to 70 percent of its revenue from property taxes.

The California State Board of Equalization handles property tax enforcement.

“Equalization” means checking to make sure the assessment are applied in an equal way.

The Property and Special Taxes Department administers three major property tax programs: the State-Assessed Property program; the Private Railroad Car Tax program; and the Timber Yield Tax program.

In addition, the Department provides guidance to the 58 county assessors, who are charged with establishing values for approximately 12 million properties each year, and monitors the adequacy of their assessment practices.

The Tax Area Services Section is responsible for maintaining all property tax-rate area maps and for maintaining special revenue district boundaries.

California County tax bills sent once a year for two payments, by state law.

$7000 homestead exemption.

Better if monthly.

The value of property depends on the property rights.

The most complete rights are fee simple.

Zoning and other regulations can restrict the use of property, reducing its market value.

There can be shared rights, such as with easements and covenants.

Appraisers and assessors

Three methods of estimating value

Market or sales comparison. What buyers and real estate agents do less rigorous.

Use at least a few sales. Must be arms-length.

Those seeking real estate for investment or speculation should look at 100 properties.

Adjust for the features of that property, such as a corner lot.

Easier to do with land value than to compare buildings.

Cost approach, can use reproduction cost or replacement cost; the latter is more reasonable.

Subtract real depreciation, not tax-based depreciation.

Need to estimate the useful duration of the building.

There can be functional obsolescence: loss of value from a change in technology.

There is also economic obsolescence, from a change in the neighborhood,

or zoning, or highways.

Residual is land value.

Income capitalization approach:

select a capitalization rate or gross income multiplier,

calculate the present or expected income, convert to present value.

Discounted cash-flow analysis: forecast the expected income for each year and the selling price

at the end of the expected holding period. Convert to present value.

Appraisers use all three, when available and suitable.

Tas assessors also use neighborhood maps.

P. 474: 4 aspects of land value

accessibility, cost of land conversion, expected future rent increase, agricultural value.

Accessibility: greater value in city center or near transit and highways.

Location, location, and timing.

72 percent of local government revenue.

Most by localities, on real estate.

Car “registration” plus property tax.

Have become a lower portion of taxation.

Tax on two types of property: land and structures.

Supply of land is fixed.

Tax does not increase rent, comes out of rent.

Owner at time of tax increase bears the burden.

Decreases the price, but public goods increase rent.

After transition, incidence of LVT is on whom? Nobody.

Lower land price offsets land tax.

Effect on tax on structures.

Suppose supply of capital elastic. Capital is mobile.

Builders will not reduce their price or profits.

Some of the tax is passed on to buyers and tenants, and some reduces land rent.

Local taxation: tax on capital reduces capital investment.

Pennsylvania example with property taxes and split rates.

Local income tax induces longer commuting.

Property tax suitable for local revenues.

Local provision can be more specialized, e.g. schooling.

More innovation and differentiation.

Local government more responsive, accessible.

Less opportunity for special interests and waste.

Property tax as a user fee.

For territorial goods - land rent tax.

Hence, the form of a tax, but in substance, a user fee.

No excess burden because of land,

but also the tax and benefits cancel out.

If local services financed by taxes on labor, labor pays twice: rent and taxes.

Property tax combines the worst tax with the best tax.

Tax on structures is a tax on capital.

People are punished for improving their homes.

Deteriorating slums get rewarded by lower taxes on structures.

Land-only taxes have been voted for in Australia, New Zealand, Denmark, Pennsylvania.

Johannesburg, South Africa. Sydney, Australia. Pittsburgh, PA.

Environmentalists like it.

Problem: highly visible, and paid infrequently.

Should be paid monthly, like a utility bill.

Easier to oppose than sales taxes, because local, & property owners more concentrated.

Property or land tax provides fiscal autonomy.

Grants increasing; 1/3 of local revenues.

Can be used to equalize resources.

Or for pork barell.

Fed govt can be considered a cartel of state governments.

Conditional grants - consistent with 10th Amendment?

90% fed grants conditional.

Also matching grants. Shift use of resoruces.

Unconditional grant: parallel shift of budget.

Same as revenue sharing. But threat of ending.

Breeds dependence. Constituencies.

Flypaper effect: money sticks to where it hits.

Grants induce greater spending than taxes.

American cities in trouble. E.g. DC.

Crime. Decaying neighborhoods. Debt. Welfare costs.

Middle class flees, concentrating the problem.

Some argue: create a larger area governmlent.

But this deals with effects, not the cause.

Decaying neighborhoods because no local control.

Reduce barriers to enterprise, better education, governance.

Local governments have used the following fiscal tools to circumvent the prohibition of ad

valorem property taxes.

1) Developer taxes.

2) Tax increment financing.

3) Property-related "fees" are levied as incidental to property ownership and are collected with the property-tax bill. New and increased fees such as for garbage collection or sewer service require voter approval if the fee is related to the property. Fees based on usage are not restricted.

4) Benefit assessments are especially used by special districts and are used for services such as parks and streets. New assessments require approval by the majority of the property owners in proportion to the assessment liability. The thousands of assessment districts finance benefits such as landscape development, street lighting, flood control, and sewage maintenance. They are levied with the property tax bill.

5) Local governments can become partners with private enterprise to develop projects such as

shopping centers and sports stadiums, the city providing the infrastructure. In addition to providing financing or subsidies or services, the governmental side can provide favors such as a relaxation of zoning or tax abatements.

6) Certificates of Participation (COP) are issued by a nonprofit organization established by a

government. Although the organization is established by a government, the bonds are technically for the nonprofit entity, so they do not need voter approval. The holders of the bonds receive not interest but shares of the revenues, the government renting the facility from the organization. The bonds finance infrastructure or other capital goods.

7) Mello-Roos debt, legislated in 1982, finances infrastructure or services in a designated

"community facilities district," usually undeveloped (Horler, 1987) . Either two-thirds of the

residents or owners of two-thirds or the land area (voted on in proportion to land held) can vote to issue bonds, which become a lien against the real estate. The homeowners are responsible for the payment of the debt, as an item in the property tax bill. The Mello-Roos payments have in some cases replaced much of the Pre-13 property tax.

8) User fees

User fees have also been increased to make up for the loss of property tax revenue. Some of

these are effectively rent. A parking meter charge is a payment to rent street space for parking, in

addition to being a congestion charge, if it is paid when the street space is crowded. As calculated

by Donald Shoup,

"Converting the revenue per parking space into the revenue per front foot shows the

surprising ability of curb parking to finance public improvements. If the average block has

33 parking spaces on its 1012-ft perimeter, and if each space earns $1800 a year, the block

will earn $59,400, or $59 a year per linear front foot. This revenue can pay to clean and

repair the sidewalks, plant and trim street trees, and provide other important public


9) Parcel taxes. These are levied on the size of property, either for the lot or for the square footage of improvements. The parcel revenue can be used for any designed purpose. While the state-wide parcel tax failed with Proposition 88, many local parcel taxes have been levied.