1. Property Taxes Lecture 8 October 18, 2005 PA 546 Constantine Hadjilambrinos

2. Property taxes are local governments’ primary source of tax revenue (72.3%). Property taxes are local governments’ primary source of tax revenue (72.3%). Irreplaceable, in that there is no other tax source that can be locally levied and administered. Irreplaceable, in that there is no other tax source that can be locally levied and administered. Only approximation to a “wealth” tax— promotes equity: Only approximation to a “wealth” tax— promotes equity:  Top 1% of income earners own 30% of wealth.  Top 1% of income earners receive 20% of income. Generally applied to real property. Generally applied to real property.

3. Types of property PA 546 Constantine Hadjilambrinos Real Land and improvements Personal Everything that can be owned that is not real property Tangible Property held for its own sake (Cars, TVs, books) Intangible Property representing ownership of something of value (Stocks, bonds, financial assets)

4. PA 546 Constantine Hadjilambrinos Property tax design In U.S. property tax rates are, generally, not pre- set—they are calculated on the basis of expenditures and revenues from other sources. In U.S. property tax rates are, generally, not pre- set—they are calculated on the basis of expenditures and revenues from other sources. E=Total of approved expenditures NPR=Estimate of total non-property tax revenues NAV=Net assessed value Rate (r) = (E – NPR) NAV

5. PA 546 Constantine Hadjilambrinos Example E = Total of approved expenditures $95,000 NPR = Estimate of total non-property tax revenues $15,000 NAV=Net assessed value $1,750,000 r =.0458 or 4.58% Rate (r) = (95,000 – 15,000) 1,750,000

6. PA 546 Constantine Hadjilambrinos Several jurisdictions (i.e. city, county, school district) often levy property taxes on the same property. Several jurisdictions (i.e. city, county, school district) often levy property taxes on the same property. Property tax is levied on the estimated value of the property. This value is estimated through an assessment process. Property tax is levied on the estimated value of the property. This value is estimated through an assessment process. Assessed value is very often different from the market value. Assessed value is very often different from the market value.  Market value is the price at which a willing buyer and a willing seller agree to complete a transaction.

7. Effective Tax Rate PA 546 Constantine Hadjilambrinos Because of the significant differences in ways in which property values for tax purposes are calculated. Because of the significant differences in ways in which property values for tax purposes are calculated. Assessment Ratio (AR) = Assessed Value (AV) Market Value (MV) Effective Tax Rate (ETR) = Tax (T) Market Value (MV) ETR = Statutory Tax Rate (r) x Assessed Value Market Value = r x AR

8. PA 546 Constantine Hadjilambrinos Property appraisal (assessment) process is crucial. The most widely used standard is market value. Widely recognized and consistent standard Widely recognized and consistent standard Testable Testable  Markets may not always operate effectively  Actual prices may not reflect true value Often there are special exemptions for certain uses and users.

9. PA 546 Constantine Hadjilambrinos Less widely used standard—reassessment on sale. Avoids taxing property owners for unrealized gains on their property Avoids taxing property owners for unrealized gains on their property Assures predictability of tax payments for property owners Assures predictability of tax payments for property owners Achieves revenue stability for local governments (?) Achieves revenue stability for local governments (?)  Disrupts housing market  Encourages unrecorded property transactions  Does not meet equity criteria

10. Doing Assessment: Cycles PA 546 Constantine Hadjilambrinos Mass cyclical assessment—all properties assessed once within a set number of years. Mass cyclical assessment—all properties assessed once within a set number of years. Segmental assessment—a set proportion of the properties in a jurisdiction are assessed every year. Segmental assessment—a set proportion of the properties in a jurisdiction are assessed every year. Annual—all properties assessed each year (it has to be a true assessment). Annual—all properties assessed each year (it has to be a true assessment).

11. Doing Assessment: Approaches PA 546 Constantine Hadjilambrinos Market data (comparable sales)—good for properties that are not unique. Market data (comparable sales)—good for properties that are not unique. Income—good for properties that are income- producing. Income—good for properties that are income- producing. Cost (summation)—good for unique properties. Cost (summation)—good for unique properties. Reproduction cost—cost of re-building the exact same building. Reproduction cost—cost of re-building the exact same building. Replacement cost—cost of replacing building with one of comparable utility. Replacement cost—cost of replacing building with one of comparable utility.

12. Exemptions and Abatements PA 546 Constantine Hadjilambrinos Granted to certain institutions and individuals or to certain types of property. Homestead—primary residence. Homestead—primary residence. Veterans—to military veterans. Veterans—to military veterans. Old-age—to individuals of a certain age. Old-age—to individuals of a certain age. Business incentives—granted to attract business. Business incentives—granted to attract business. Government property (tax exempt) Government property (tax exempt) Religious, educational, charitable, and other non- profit entities (generally tax exempt) Religious, educational, charitable, and other non- profit entities (generally tax exempt)

13. Circuit-Breakers PA 546 Constantine Hadjilambrinos Designed to focus property tax relief to those individuals most in need. Requires integration of property and income tax systems. Requires integration of property and income tax systems. Program cost sets limits to which individuals may benefit. Program cost sets limits to which individuals may benefit. Income needs to be defined more broadly than federal or state taxable income. Income needs to be defined more broadly than federal or state taxable income. Renters may deserve relief more than homeowners. Renters may deserve relief more than homeowners.

14. Deferrals Tax deferred to a later date—not excused. Tax deferred to a later date—not excused. Deferrals address most of the problems circuit- breakers and exemptions attempt to address, but without many of the design problems inherent in the latter. Deferrals address most of the problems circuit- breakers and exemptions attempt to address, but without many of the design problems inherent in the latter. PA 546 Constantine Hadjilambrinos

15. Classification Different tax rates apply to different types of properties. Different tax rates apply to different types of properties. Assumes that some classes of properties have greater tax-bearing capacity than others. Assumes that some classes of properties have greater tax-bearing capacity than others. There is more variation in tax-bearing capacity within classes of properties than between. There is more variation in tax-bearing capacity within classes of properties than between. PA 546 Constantine Hadjilambrinos

16. Tax Increment Financing Extra taxes generated by increase in value of property due to development are targeted to promoting the development. Can be effective in promoting development. Can be effective in promoting development. Diverts revenue from normal uses (such as school financing). Diverts revenue from normal uses (such as school financing). Can be misused if returned to recoup costs not related to improving infrastructure around development project. Can be misused if returned to recoup costs not related to improving infrastructure around development project. PA 546 Constantine Hadjilambrinos

17. Measuring assessment disparities Coefficient of Dispersion (CD) can measure the degree of disparity. Coefficient of Dispersion (CD) can measure the degree of disparity. CD measures the extent of differences in assessment ratios, i.e. the extent to which effective property tax rates vary within a jurisdiction. CD measures the extent of differences in assessment ratios, i.e. the extent to which effective property tax rates vary within a jurisdiction. Calculation of CD requires knowledge of true market value of property. Calculation of CD requires knowledge of true market value of property. PA 546 Constantine Hadjilambrinos

18. Limits and Controls Unpopularity of property taxes led to the imposition of various limits and controls. Statutory property tax rate limits. Statutory property tax rate limits. Property tax rate freezes. Property tax rate freezes. Property tax levy limits. Property tax levy limits. Local expenditure lids. Local expenditure lids. PA 546 Constantine Hadjilambrinos