Property tax
From Wikicpa
Property tax is a tax that an owner of real estate or other property pays on the value of the thing taxed. 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. Under any system of property tax the true property "owner" is actually the State and the entity in possession of the property the renter thereof.
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United States
In the United States, property tax on real estate is usually assessed by local government, at the municipal or county level. 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.
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 and similar vehicles;
- other durable goods (though typically household goods and personal effects are exempt);
- inventory;
- intangible assets such as stocks and bonds.
Personal property taxes can be assessed at almost any level of government, though they are perhaps most commonly assessed by states.
Impacts
Sprawl
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 tend to increase sprawl.
Attempts to reduce the impact of property taxes on sprawl include:
- Land value taxation - This method assesses the value of a given property based only upon its undeveloped value, or "ground rent". By removing improvents as a factor in the property taxes, the effect of city encroachment is removed.
- Current-use valuation - This method assesses the value of a given property based only upon its current use. Much llike 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.
- Urban growth boundary or Green belt - Government declars 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 held to be regressive (that is, to fall disproportionately on those of lower income) 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. However, their current income level is low. Therefore, a larger proportion of their income goes to paying the property tax. In areas with high real estate appreciation (such as California in the 1970s and 2000s), there is often little or no relationship between property taxes and a homeowner's ability to pay them. The regressive nature of the tax was a common argument used by supporters of California Proposition 13. 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 completely incompatible - it is possible for a tax to be progressive in general but to be regressive in relation to minority groups. As a result of these contradictions, some economists have called for the abolition of property taxes altogether, to be replaced by income taxes, consumption taxes such as Europe's value added tax, or a combination of both.
Rising property values can cause increases in the tax on a property even when the owner of a property does nothing that would cause the value of their home to increase. For homeowners whose income does not rise as fast as the assessed value of their house, property taxes sometimes create enough of a burden that they are forced to sell their homes and move to less expensive properties. [1] 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. [2] 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. [3] [4]
Undeserved homestead exemption credits became so ubiquitous in the state of Maryland that a bill was introduced in the 2006 legislative session to enable validation of principal residence status through the use of a principal residence verification field on the state income tax return. [5] The bill passed unanimously in the Maryland House of Delegates, but died in committee in the Maryland Senate.
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".
The Supreme Court of the United States has held that Congress cannot directly tax land ownership. However, indirect taxes on the transfer of land are permitted: 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.
