©2011 Cengage Learning

Chapter 12 ©2011 Cengage Learning THE ECONOMICS OF REAL PROPERTY TAXATION

Government levies taxes to generate revenue Other sources of revenue: Fines Fees borrowing ©2011 Cengage Learning The Principles of Taxation

The Taxing Process A tax on consumers or businesses reduces their spendable income. Less spendable income reduces demand. Government can release resources in the form of services. The federal government can easily borrow money for deficit spending purposes. State and local governments have greater difficulty in borrowing money for projects. ©2011 Cengage Learning

Adam Smith’s Theory of Taxation Tax burden should be spread equally among all citizens. Taxpayer should know how much tax is owed, when it is owed, and for what it is being used. Cost of collection should be small in relation to the amount of taxes collected. ©2011 Cengage Learning

Two Major Taxation Philosophies Ability to pay Benefits received ©2011 Cengage Learning

Both philosophies have problems Higher taxes stifle incentive Cause people to seek tax loopholes Only benefit a portion of society Cause conflicts between rich & poor ©2011 Cengage Learning

Evaluation of Tax Impact “Progressive tax” increases in rate as the value of a taxable item or income increases. “Proportional tax” retains the same rate as the value of the item or income increases. “Regressive tax” declines in rate as the value or income increases. ©2011 Cengage Learning

The Burden of Income Tax Personal income tax is somewhat progressive. The degree of progressive characteristics is altered by the use of tax experts. Sales tax appears proportional but often is regressive for lower income consumers, because a larger portion of their income goes to taxed goods. Many states have exempted food, Rent, and utilities from sales tax. Ultimately, all taxes are paid by people. ©2011 Cengage Learning

Local Government Uses of Property Taxes Need to obtain revenue Property taxes do not fluctuate as much as sales and income taxes. Provides a stable source of revenue ©2011 Cengage Learning Evaluating Property Tax

Who Pays Property Taxes? Typically paid by the property owner. Income property owners see this tax as an expense that is recovered through the rent paid. ©2011 Cengage Learning

Value Loss Caused by Property Tax Increase BeforeAfterChange Taxes $1,000/yr.$1,100/yr$100 tax increase Net Income divided by the $10,000$9,900$100 reduction Capitalization Rate equals the 10% none Value Estimate $100,000$99,000$1,000 loss ©2011 Cengage Learning Net Income Capitalization Rate = Value Estimate

How Real Property Taxes Influence Land Use Religious, education and charitable institutions are tax exempt which encourages developing facilities. Speculation that raises rural land assessments encourages conversion of rural land to higher value uses. Taxing resources at full value encourages exploitation in an effort to create positive cash flows in a shorter time period. ©2011 Cengage Learning

How Real Property Taxes Influence Land Use Reducing taxes to encourage or attract businesses. Tax default can convert private ownership to government ownership. Higher property taxes encourage higher intensive uses. Cities encourage retail development to develop sales tax revenue. ©2011 Cengage Learning

Several Real Property Tax Reform Proposals Exemptions for low income individuals Exemptions for homeowners Updating the professional skills of the Assessor’s Office Placing limits on property taxes ©2011 Cengage Learning Real Property Tax Reform

Additional Taxes Special assessments like a sewer assessment district Inheritance taxes Gift taxes income taxes Transfer taxes Severance taxes on natural resources ©2011 Cengage Learning

It appears that the property taxes will remain as a major source of revenue for local governments into the future! ©2011 Cengage Learning