Property Taxes

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Property Taxes
PA 546 Constantine Hadjilambrinos

• Lecture 8
• October 18, 2005

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PA 546 Constantine Hadjilambrinos

• 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.
• Only approximation to a wealth taxpromotes
  equity
• Top 1 of income earners own 30 of wealth.
• Top 1 of income earners receive 20 of income.
• Generally applied to real property.

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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)
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Property tax design
PA 546 Constantine Hadjilambrinos

• In U.S. property tax rates are, generally, not
  pre-setthey are calculated on the basis of
  expenditures and revenues from other sources.
• ETotal of approved expenditures
• NPREstimate of total non-property tax revenues
• NAVNet assessed value

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Example
PA 546 Constantine Hadjilambrinos

• E Total of approved expenditures
• 95,000
• NPR Estimate of total non-property tax
  revenues
• 15,000
• NAVNet assessed value
• 1,750,000
• r .0458 or 4.58

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PA 546 Constantine Hadjilambrinos

• 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.
• 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.

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Effective Tax Rate
PA 546 Constantine Hadjilambrinos

• Because of the significant differences in ways in
  which property values for tax purposes are
  calculated.

r x AR
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PA 546 Constantine Hadjilambrinos

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

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PA 546 Constantine Hadjilambrinos

• Less widely used standardreassessment on sale.
• Avoids taxing property owners for unrealized
  gains on their property
• Assures predictability of tax payments for
  property owners
• Achieves revenue stability for local governments
  (?)
• Disrupts housing market
• Encourages unrecorded property transactions
• Does not meet equity criteria

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Doing Assessment Cycles
PA 546 Constantine Hadjilambrinos

• Mass cyclical assessmentall properties assessed
  once within a set number of years.
• Segmental assessmenta set proportion of the
  properties in a jurisdiction are assessed every
  year.
• Annualall properties assessed each year (it has
  to be a true assessment).

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Doing Assessment Approaches
PA 546 Constantine Hadjilambrinos

• Market data (comparable sales)good for
  properties that are not unique.
• Incomegood for properties that are
  income-producing.
• Cost (summation)good for unique properties.
• Reproduction costcost of re-building the exact
  same building.
• Replacement costcost of replacing building with
  one of comparable utility.

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Exemptions and Abatements
PA 546 Constantine Hadjilambrinos

• Granted to certain institutions and individuals
  or to certain types of property.
• Homesteadprimary residence.
• Veteransto military veterans.
• Old-ageto individuals of a certain age.
• Business incentivesgranted to attract business.
• Government property (tax exempt)
• Religious, educational, charitable, and other
  non-profit entities (generally tax exempt)

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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.
• Program cost sets limits to which individuals may
  benefit.
• Income needs to be defined more broadly than
  federal or state taxable income.
• Renters may deserve relief more than homeowners.

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Deferrals
PA 546 Constantine Hadjilambrinos

• Tax deferred to a later datenot 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.

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Classification
PA 546 Constantine Hadjilambrinos

• Different tax rates apply to different types of
  properties.
• 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.

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Tax Increment Financing
PA 546 Constantine Hadjilambrinos

• Extra taxes generated by increase in value of
  property due to development are targeted to
  promoting the development.
• Can be effective in promoting development.
• 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.

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Measuring assessment disparities
PA 546 Constantine Hadjilambrinos

• 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.
• Calculation of CD requires knowledge of true
  market value of property.

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Limits and Controls
PA 546 Constantine Hadjilambrinos

• Unpopularity of property taxes led to the
  imposition of various limits and controls.
• Statutory property tax rate limits.
• Property tax rate freezes.
• Property tax levy limits.
• Local expenditure lids.