1. Major Tax Structures: Property Taxes Troy University PA6650- Governmental Budgeting Chapter 10

2. Review Three Predominant Tax Bases – INCOME –Spending on GOODS & SERVICES –PROPERTY

3. Overview Local governments collect over $300B from property taxes each year They produce stable, independent revenue Mostly used to source independent school districts

4. Desirable Features They are a close approximation to actual wealth Applied to accumulated wealth, not income or consumption Not based on transactions

5. Structural Distinctions Real Property –Includes real estate, land, improvements on the land, trees, crops, minerals, buildings, fences Personal property –Everything that can be owned that isn’t real property, like machinery, equipment, jewelry, autos, furniture, stocks and bonds, and much more –Tangible property is valued for its own sake, like gold or silver –Intangible property represents a claim of something valuable (stock, financial assets)

6. Structural Issues Advantages –Base is immobile –Tax is stable –Tax rate can locally vary –Benefit-based (e.g., fire and police protection) –Industry can be charged for negative externalities –System is visible –Local government decisions affect property values

7. Structural Issues Disadvantages –Regressive (effective rate higher for low incomes) –Poor horizontal equity –Taxes create geographic pockets of affluence and poverty –Tax burden can be high for high-growth communities –Can reduce prospects for economic development

8. Rates, Levies, & Assessed Value How much should we tax? –Expenditure plan = E –Revenue estimate from nonproperty sources = NPV –Property tax levy (E-NPR) –Net Assessed Value (NAV) R=(E-NPR)/NAV

9. Rates, Levies, & Assessed Value Tax bill like a layer cake –$4.58 for the village –$1.22 for the county –$3.25 for the school district –$9.05 on the NAV of the property –Virginia Beach is $.89/$100 of assessed value

10. Assessments Estimates value, distributes the tax burden Appraisal standards –Market value –what the property would sell for in cash –Special exception for agricultural land –VALUE IN USE – current use value assessment –Assessment-on-sale or Acquisition value –Properties are revalued when they are sold CA Proposition 13) –Good for long-term owners that hold property –Predictable tax payments, predictable revenue for locality –Area-based (size of property) –Cadastral (physical attributes, like size, design, soil)

11. Assessment Cycles Mass cyclical assessment –All properties valued in a particular year (every 2-10 years) Segmental assessment –Specified fraction of parcels assessed each year (3-year cycle) Annual assessment –Reappraisal and estimates

12. Assessment Methods Market data or comparable sales approach Income approach (income-producing properties) Cost or summation approach (land-as-is improvements) –Reproduction cost (cost to replicate with its faults) –Replacement cost (cost to build new with same utility)

13. Property Tax Relief Mechanisms Exemptions and Abatements Exemptions –Reduce the tax base –Granted for certain individuals or institutions GOVERNMENT PROPERTY RELIGIOUS, EDUCATION, CHARITABLE, NONPROFIT HOMESTEAD, VETERAN, OLD AGE Abatements –Negotiated contract that forgives tax for a period of time

14. Property Tax Relief Mechanisms Problems with exemptions –State changes can adversely affect localities –Programs don’t focus on tax relief for needy –Exemptions may result in an increased tax rate –Individual exemptions don’t reach renters Some commercial / industrial exemptions –Pollution, energy equipment Fully-exempt properties are significant!

15. Property Tax Relief Mechanisms Circuit Breakers –Residential property circuit breakers An adjustment to your income tax Sometimes targeted to poor and elderly Some renter-relief programs Threshold v. sliding scale Deferrals –Elderly, disabled, farmers can “pay later”

16. Property Tax Relief Mechanisms Classification –Different effective rates for different types of property –Homeowners, farmers, businesses –There are rich and poor in each category Tax Increment Financing –Freezes the value of a property –Offset increases used to pay for infrastructure

17. Fractional Assessment / Assessment Disparity Assessment at less than market value How do you know your assessment is fair? Affects state-imposed thresholds Creates a non-uniform tax burden Coefficient of dispersion - variance

18. Limits and Controls Proposition 13 tax revolt Maximum growth rates established Increased fiscal stress and less flexibility

19. Conclusion Property taxis king for local government It taxes wealth Assessment is costly and troublesome Some strong advantages