Policy Options for Taxing Real Property

1
Policy Options for Taxing Real Property

• Enid Slack
• Institute on Municipal Finance and Governance
• IPTI Conference
• Prague, Czech Republic
• August 23, 2005

2
Policy Options for Taxing Real Property
Introduction

• Property tax is important for local governments
• Generates significant revenue
• Essential tool for local autonomy
• Property tax policy has implications for how the
  tax works and for the operation of local
  governments
• Economics principles and political realities
  often dictate different tax policy decisions

3
Outline of presentation

• Economic principles for designing a good tax
• Unique features of the property tax that affect
  policy choices
• Tax base (land versus land and improvements,
  exemptions, method of assessment)
• Tax rates
• Property tax relief
• Tax administration

4
Economic principles for designing a good local tax

• Equity based on benefits received
• Equity based on ability to pay
• Efficiency
• Accountability
• Stability and predictability
• Ease of administration

5
Unique features of the property tax

• Visible
• Inelastic
• Immovable
• Based on benefits received
• Local autonomy
• Arbitrariness of tax base

6
Choice of tax base

• Land only
• Provides incentive to develop land
• Progressive in incidence
• Problems with accurate evaluation
• Fewer potential revenues
• Land and improvements
• Discourages investment in property
• Less progressive
• Easier to evaluate under some circumstances
• Lower tax rates to achieve same revenues

7
Tax base - exemptions

• Some properties are exempt in most countries
  (churches, cemeteries, government properties)
• Inequitable
• Affects location decision
• Disproportionate tax burdens across
  municipalities
• Implications for economic competition

8
Tax base - exemptions

• What needs to be done
• Minimize exemptions
• Payments in lieu on government properties
• Grants instead of exemptions
• Assessed values for exempt properties

9
Assessment Methods

• Area-based assessment
• Unit assessment
• Unit value assessment
• Value-based assessment
• Market value assessment
• Rental value assessment
• Self assessment

10
Area-based assessment

• Per unit assessment rate is levied per m2 of
  land area, building or a combination of the two
• Unit value assessment assessment rate per m2 is
  adjusted to reflect location or other factors

11
Market value assessment

• Price between a willing buyer and a willing
  seller in an arms length transaction
• Approaches to estimating market value
• Comparable sales
• Depreciated cost
• Income

12
Rental value assessment

• In theory, tax on rental value should be
  equivalent to a tax on market value
• In practice, rents reflect current use and not
  highest and best use
• Difficult to estimate rental value when there
  are rent controls
• Issues around vacant land

13
Area-based versus value-based assessment

• Market value is preferred because it
• Reflects benefits from local services
• Captures neighbourhood amenities
• Is less regressive than area-based
• Less inequitable over time
• Can move from area to value-based

14
Self assessment

• Tendency for under-estimation
• Needs verification process
• Requires taxing authority to buy property at self
  assessed value

15
Tax rates

• Need for local taxing authority
• Limits to avoid tax competition and tax exporting
• Differential rates to reflect
• differential benefits received
• mobility of capital
• land use objectives

16
Property tax relief measures

• Relief measures can vary according to
• Characteristics of the property (residential or
  non-residential)
• Characteristics of beneficiaries (e.g. seniors)
• Whether they are permanent or transitory

17
Property tax relief measures

• Property tax credits
• Tax deferrals
• Exemptions
• Grants
• Tax reductions, cancellations or refunds
• Tax limitations (e.g. Proposition 13)

18
Property tax relief measures

• Relief schemes make tax more acceptable to
  taxpayers
• Tax limitations are inequitable and inefficient
• Property tax freezes break the link between
  expenditures and revenues
• Difficult to end transitional measures

19
Tax administration

• Tax administration has impact on revenue yield
  and efficiency and equity of the tax
• Elements of tax administration
• Property identification
• Assessment
• Tax collection and enforcement

20
Conclusions

• Need to design property tax system that is
  politically acceptable, administratively
  feasible, and adheres to economics principles