Property tax
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Property tax, or millage tax, is an ad valorem tax that an owner pays on the value of the property being taxed.
There are three species or types of property: Land, Improvements to Land (immovable manmade objects; i.e., buildings), and Personalty (movable manmade objects). Real estate, real property or realty are all terms for the combination of land and improvements. The taxing authority requires and/or performs an appraisal of the monetary value of the property, and tax is assessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions.
The special assessment tax may often be confused with the property tax. These are two distinct forms of taxation: one (ad valorem tax) relies upon the fair market value of the property being taxed for justification, and the other (special assessment) relies upon a special enhancement called a "benefit" for its justification.
The property tax rate is often given as a percentage. It may also be expressed as a permille (amount of tax per thousand currency units of property value), which is also known as a millage rate or mill levy. (A mill is also one-thousandth of a dollar.) To calculate the property tax, the authority will multiply the assessed value of the property by the mill rate and then divide by 1,000. For example, a property with an assessed value of US$ 500,000 located in a municipality with a mill rate of 20 mills would have a property tax bill of US$ 10,000.00 per year.[1]
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[edit] Countries
[edit] Canada
Many provinces in Canada levy property tax on real estate based upon the current use and value of the land and this is the major source of revenue for most municipal governments in Canada. While property tax levels vary between municipalities in a province there is usually common property assessment or valuation criteria laid out in provincial legislation. There is a trend to use a market value standard for valuation purposes in most provinces with varying revaluation cycles. A number of provinces have established an annual reassessment cycle where market activity warrants while others have longer periods between valuation periods.
[edit] Hong Kong
In Hong Kong, there is a kind of tax named a property tax, but it is not an ad valorem tax; it is actually classified as an income tax.
According to HK Inland Revenue Ordinance IRO s5B, all property owners shall not be subject to this tax; unless the HK property owner has received a consideration, the example is rental income for the year of assessment. The property tax shall be computed on the net assessable value at the standard rate.
[edit] Year of Assessment
The period of assessment is from April 1st to March 31st of the following year.
[edit] Net assessable value
The formula is:
- Net assessable value = 80% of Assessable value.
- HK property tax payable = Net assessment value X Property tax standard rate
- Assessable value = Rental income + Premium + (Rental bad debt recovered - Irrecoverable rent) - Rates paid by owner.
[edit] See also
[edit] Jamaica
This tax is paid in the same way as a mortgage, an annual payment depending on the value of one's assets, such as property.
[edit] Netherlands
Property tax (Dutch: Onroerend goed belasting or Onroerende zaak belasting (OZB) ) is levied on homes on a municipal basis in two parts: for the one who lives in the house, and for the owner of the house. When one has a rental home, he/she should only pay the living part of the tax. The last year's lots caused concern because of the annual raise of this tax by more than 10% in some municipalities. As of 2005, there was a Parliament proposal to retain only the owner's part of the property tax, and to raise it annually not more than the inflation rate.
[edit] United Kingdom
There is currently no ad valorem tax on residential property. Two former systems were dropped because of their extreme unpopularity. They were
- Schedule A income tax, a central government tax that was levied on the imputed rent, that is the rent that owner-occupiers of land would have been receiving from a tenant had they not been living in the houses they owned. However, actual (as opposed to imputed) rent is still subject to income tax under Schedule A;
- Rates, a local government tax that was levied in proportion to the assessed value of property. This was replaced under the Thatcher government by a poll tax, which proved even more unpopular than the rates, and was replaced by a mixed council tax which combines elements of property tax and a poll tax. Rates are still (2006) levied on business property, though some classes of business are exempt.
[edit] United States
In the United States, 'property tax' on real estate is usually assessed by local government, at the municipal or county level. A very important benefit of a tax on property over a tax on income is that the revenue always equals the tax levy, unlike income or sales taxes, which can result in shortfalls producing budget deficits. The property tax always produces the required revenue for municipalities' tax levies.
The assessment is made up of two components—the improvement or building value, and the land or site value. In some states, personal property is also taxed. A tax assessor is a public official who determines the value of real property for the purpose of apportioning the tax levy. An appraiser may work for government or private industry and may determine the value of real property for any purpose.
Tax assessor offices maintain inventory information about improvements to real estate. They also create and maintain tax maps. This is accomplished with the help of surveyors. On tax maps, individual properties are shown and given unique parcel identifiers. The tax maps help to ensure that no properties are omitted from the tax rolls and that no properties are taxed more than once. Real property taxes are usually collected by an official other than the assessor. Examples of a proposed reform to a property tax on real estate to one that falls more heavily on the land portion is provided at the following sites as sponsored by the The Henry George Foundation. Maryland, King County, Washington, Indiana, New Jersey, New York.
The assessment of an individual piece of real estate may be according to one or more of the normally accepted methods of valuation (i.e. income approach, market value or replacement cost). Assessments may be given at 100 percent of value or at some lesser percentage. In most if not all assessment jurisdictions, the determination of value made by the assessor is subject to some sort of administrative or judicial review, if the appeal is instituted by the property owner.
Ad valorem (of value) property taxes are based on fair market property values of individual estates. A local tax assessor then applies an established assessment rate to the fair market value. By multiplying the tax rate x against the assessed value of the property, a tax due is calculated.
Property taxes are imposed by counties, municipalities, and school districts, where the millage rate is usually determined by county commissioners, city council members, and school board members, respectively. The taxes fund budgets for schools, police, fire stations, hospitals, garbage disposal, sewers, road and sidewalk maintenance, parks, libraries, and miscellaneous expenditures.
Relatively recently, US property tax rates increased well above similar rates in other countries[citation needed], and exceeded 5% in some US states, thus becoming the main dwelling expense after construction.
Property taxes were once a major source of revenue at the state level, particularly prior to 1900, which was before states switched to relying upon income tax and sales tax as their main sources of revenue [2].
After determining a budget at the municipal level, a legislative appropriation determines how the monies will be collected and distributed. After that, a tax authority levies the tax. An appeal is permitted. Equalization is then considered by a board of equalizers to assure fair treatment. Then a tax rate is determined by dividing the municipal budget by the assessment role of that municipality. Multiplying tax rate by the assessed value of one's property determines one's tax rate.
Some jurisdictions have both ad valorem and non-ad valorem property taxes (better known as special assessments). The latter come in the form of a fixed charge (regardless of the value of the underlying property) for items such as street lighting and storm sewer control.
In the United States, another form of property tax is the personal property tax, which can target
- automobiles, boats, aircraft and other vehicles;
- other valuable durable goods such as works of art (most household goods and personal effects are usually exempt);
- business inventory;
- intangible assets such as stocks and bonds.
In some states, it is permissible to separate the real estate tax into two separate taxes—one the land value and one on the building value. (See Land Value Taxation.)
Personal property taxes can be assessed at almost any level of government, though they are perhaps most commonly assessed by states.
[edit] Effects
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[edit] Sprawl
In the absence of comprehensive urban planning policies, property tax on real estate changes the incentives for developing land, which in turn affects land use patterns. One of the main concerns is whether or not it encourages urban sprawl.
The market value of undeveloped real estate reflects a property's current use as well as its development potential. As a city expands, relatively cheap and undeveloped lands (such as farms, ranches, private conservation parks, etc.) increase in value as neighboring areas are developed into retail, industrial, or residential units. This raises the land value, which increases the property tax that must be paid on agricultural land, but does not increase the amount of revenue per land area available to the owner. This, along with a higher sale price, increases the incentive to rent or sell agricultural land to developers. On the other hand, a property owner who develops a parcel must thereafter pay a higher tax, based on the value of the improvements. This makes the development less attractive than it would otherwise be. Overall, these effects result in lower density development, which tends to increase sprawl.
Attempts to reduce the impact of property taxes on sprawl include:
- Land value taxation - This method separates the value of a given property into its actual components - land value and improvement value. A gradually lower and lower tax is levied on the improvement value and a higher tax is levied on the land value to insure revenue-neutrality. This method is also known as two-tiered or split-rate taxation.
- Current-use valuation - This method assesses the value of a given property based only upon its current use. Much like land value taxation, this reduces the effect of city encroachment.
- Conservation easements - The property owner adds a restriction to the property prohibiting future development. This effectively removes the development potential as a factor in the property taxes.
- Exemptions - Exempting favored classes of real estate (such as farms, ranches, cemeteries or private conservation parks) from the property tax altogether or assesing their value at a very minimal amount (for example, $1 per acre).
- Forcing higher density housing - In the Portland, Oregon area (for example), local municipalities are often forced to accept higher density housing with small lot sizes. This is governed by a multi-county development control board, in Portland's case Metro.
- Urban growth boundary or Green belt - Government declares some land undevelopable until a date in the future. This forces regional development back into the urban core, increasing density but also land and housing prices. It may also cause development to skip over the restricted-use zone, to occur in more distant areas, or to move to other cities.
[edit] Distributional
Property tax has been thought, by some, to be regressive (that is, to fall disproportionately on those of lower income) when not correctly implemented because of its impact on particular low-income/high-asset groups such as pensioners and farmers in drought years. Because these persons have high-assets accumulated over time, they have a high property tax liability, although their realized income is low. Therefore, a larger proportion of their income goes to paying the tax. In areas with speculative land appreciation (such as California in the 1970s and 2000s), there may be little or no relationship between property taxes and a homeowner's ability to pay them short of selling the property.[3] This issue was a common argument used by supporters of such measures as California Proposition 13 or Oregon Ballot Measure 5; some economists have even called for the abolition of property taxes altogether, to be replaced by income taxes, consumption taxes such as Europe's VAT, or a combination of both. Others, however, have argued that property taxes are broadly progressive, since people of higher incomes are disproportionately likely to own more valuable property. In addition, while nearly all households have some income, nearly a third of households own no real estate. Moreover, the most valuable properties are owned by corporations not individuals. Hence, property is more maldistributed than income.
It has been suggested that these two beliefs are not incompatible - it is possible for a tax to be progressive in general but to be regressive in relation to minority groups. However, although not direct, and not likely one-to-one, property renters are subject to property taxes as well. The owner's cost of taxation is passed on to the renter (occupant).
[edit] Progressive policies
As property increases in value the possibility exists that new buyers might pay taxes on outdated values thus placing an unfair burden on the rest of the property owners. To correct this imbalance municipalities periodically revalue property. Revaluation produces an up to date value to be used in determination of the tax rate necessary to produce the required tax levy.
A consequence of this is that existing owners are reassesed as well as new owners and thus are required to pay taxes on property the value of which is determined by market forces. In an effort to relieve the frequently large tax burdens on existing owners communities have introduced exemptions.
In some states, laws provide for exemptions (typically called homestead exemptions) and/or limits on the percentage increase in tax, which limit the yearly increase in property tax so that owner-occupants are not "taxed out of their homes". Generally, these exemptions and ceilings are available only to property owners who use their property as their principal residence. Homestead exemptions generally cannot be claimed on investment properties and second homes. When a homesteaded property changes ownership, the property tax often rises sharply and the property's sale price may become the basis for new exemptions and limits available to the new owner-occupant.
Homestead exemptions increase the complexity of property tax collection and sometimes provide an easy opportunity for people who own several properties to benefit from tax credits to which they are not entitled. Since there is no national database that links home ownership with Social Security numbers, landlords sometimes gain homestead tax credits by claiming multiple properties in different states, and even their own state, as their "principal residence", while only one property is truly their residence.[4] In 2005, several US Senators and Congressmen were found to have erroneously claimed "second homes" in the greater Washington, D.C. area as their "principal residences", giving them property tax credits to which they were not entitled.[5][6]
Undeserved homestead exemption credits became so ubiquitous in the state of Maryland that a law was passed in the 2007 legislative session to require validation of principal residence status through the use of a social security number matching system.[7] The bill passed unanimously in the Maryland House of Delegates and Senate and was signed into law by the Governor.[8]
The fairness of property tax collection and distribution is a hotly-debated topic. Some people feel school systems would be more uniform if the taxes were collected and distributed at a state level, thereby equalising the funding of school districts. Others are reluctant to have a higher level of government determine the rates and allocations, preferring to leave the decisions to government levels "closer to the people."
Property taxes can have a negative impact on individuals with fixed incomes such as the elderly and those who have lost their jobs. Gentrification in low income areas of a city can drive property taxes to the point where long-time residents of an area are forced to leave.
In Rhode Island efforts are being made to modify revaluation practices to preserve the major benefit of property taxation, the reliability of tax revenue, while providing for what some view as a correction of the unfair distribution of tax burdens on existing owners of property.[9]
The Supreme Court has held that Congress can directly tax land ownership so long as the tax is apportioned among the states based upon representation/population. In an apportioned land tax, each state would have its own rate of taxation sufficient to raise its pro-rata share of the total revenue to be financed by a land tax. So, for example, if State A has 5% of the population, the State A would collect and remit to the Federal government such tax revenue that equals 5% of the revenue sought. Such an apportioned tax on land had been used on many occasions up through the Civil War.
Indirect taxes on the transfer of land are permitted without apportionment: in the past, this has taken the form of requiring revenue stamps to be affixed to deeds and mortgages, but these are no longer required by federal law. Under the Internal Revenue Code, the government realizes a substantial amount of revenue from income taxes on capital gains from the sale of land, and in estate taxes from the passage of property (including land) upon the death of its owner.
The Supreme Court has not directly ruled on the question of whether Congress may impose an unapportioned tax on the "privilege" of owning land with the "measure" of the tax being the value of the land.
[edit] See also
- Land value tax
- Proposition 2½, the property tax and auto excise tax limitation law in Massachusetts.
- Real property use tax - United States tax reform
[edit] External links
- Urban Sprawl and the Property Tax
- Neutral Property Taxation
- The Property Tax as a Tax on Value: Deadweight Loss
- Property Tax Section of Taxation World
- History of Property Taxes in the United States
- A Measure of Constant Property Tax (Ottawa Canada)
- HindSite provides a historical overview of state and local fiscal politics in the U.S., with a focus on property taxation.
- Guardian Newspaper article on property taxes with example from Denmark
- How to calculate the millage rate in Georgia
- Property tax rates in the different states
