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: Land and improvements:
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 Value-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 arm’s 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