Transcript Policy Options for Taxing Real Property

Policy Options for Taxing
Real Property
Enid Slack
Institute on Municipal Finance and Governance
IPTI Conference
Prague, Czech Republic
August 23, 2005
1
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
2
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
3
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
4
Unique features of the
property tax






Visible
Inelastic
Immovable
Based on benefits received
Local autonomy
Arbitrariness of tax base
5
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
6
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
7
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
8
Assessment Methods

Area-based assessment



Value-based assessment



Unit assessment
Unit value assessment
Market value assessment
Rental value assessment
Self assessment
9
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
10
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
11
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
12
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
13
Self assessment

Tendency for under-estimation

Needs verification process

Requires taxing authority to buy
property at self assessed value
14
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
15
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
16
Property tax relief measures






Property tax credits
Tax deferrals
Exemptions
Grants
Tax reductions, cancellations or refunds
Tax limitations (e.g. Proposition 13)
17
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
18
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
19
Conclusions

Need to design property tax system that
is politically acceptable, administratively
feasible, and adheres to economics
principles
20