1

Policy Options for Taxing Real Property

Enid SlackInstitute on Municipal Finance and Governance

IPTI ConferencePrague, 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:

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 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