Administration, Incidence, and Relief Anderson: Property Tax
Copyright © by Houghton Mifflin Company. All rights reserved. 2 Property Tax Administration Assessment administration Equalization mechanisms Other aspects of administration
Copyright © by Houghton Mifflin Company. All rights reserved. 3 Property Tax Incidence Traditional view of incidence Capital tax view of incidence Benefit view of incidence
Copyright © by Houghton Mifflin Company. All rights reserved. 4 Traditional View, Assumptions A local housing market is considered in which the effects of increasing the tax on local housing are analyzed. Partial equilibrium view of local housing market. Small, open economy assumptions. Supply of capital is infinitely elastic at the fixed national rate of return. Land is fixed in supply.
Copyright © by Houghton Mifflin Company. All rights reserved. 5 Figure 16.2: Special Cases for the Supply of Capital
Copyright © by Houghton Mifflin Company. All rights reserved. 6 Traditional View, Implications Local capital bears no burden, since capital migrates out until the after-tax rate of return is equal to the national rate. Tax burden is borne by local factors and/or housing consumers in higher housing prices. Tax burden is borne in proportion to housing consumption. Therefore, incidence is regressive. Long-run effects in housing market illustrated in Figure 3.
Copyright © by Houghton Mifflin Company. All rights reserved. 7 Figure 16.3: Effects of a Property Tax
Copyright © by Houghton Mifflin Company. All rights reserved. 8 Capital Tax View, Assumptions Property tax is a distortionary tax on local use of capital, resulting in a misallocation of the national capital stock across communities. General equilibrium model of capital. Fixed national capital stock. Free mobility of capital across jurisdictions.
Copyright © by Houghton Mifflin Company. All rights reserved. 9 Capital Tax View, Implications Burden of the average rate of property tax is borne by all owners of capital throughout the nation. This is the capital tax effect. Capital owners in high/low jurisdictions bear the burden of the difference between the local tax rate and the average national tax rate. This is the excise tax effect. An inefficient allocation of capital occurs across jurisdictions.
Copyright © by Houghton Mifflin Company. All rights reserved. 10 Figure 16.4: Capital and Excise Tax Effects of Property Taxation
Copyright © by Houghton Mifflin Company. All rights reserved. 11 Benefit View, Assumptions Tiebout Model Consumer mobility (voting with feet) and inter-jurisdictional competition are sufficient to provide efficiency in the provision of local public goods/services. Individuals sort into communities according to their demands for local public goods/services. There are enough localities to accommodate all tastes. Local communities are homogeneous in house values.
Copyright © by Houghton Mifflin Company. All rights reserved. 12 Benefit View, Implications Perfect capitalization occurs, converting the property tax into a benefits tax. Hence, the property tax is essentially a user charge for local public services. As a benefits charge, there are no impacts on the distribution of income to consider. The tax is non-distortionary and has no efficiency effect.
Copyright © by Houghton Mifflin Company. All rights reserved. 13 Property Tax Capitalization Capitalization in theory Tax capitalization Local public good capitalization
Copyright © by Houghton Mifflin Company. All rights reserved. 14 Capitalization Recall that for a perpetuity the value of the asset is V=R/r where R is the annual net rent and r is the discount rate. Now, if we tax the annual net rent we have V=(R-T)/r and the tax is capitalized into the value of the asset. V=R/r-T/r.
Copyright © by Houghton Mifflin Company. All rights reserved. 15 Capitalization, [continued] In the more general case, value is the present discounted stream of net income generated by the property:
Copyright © by Houghton Mifflin Company. All rights reserved. 16 Capitalization, [continued] With a tax, the value of the property becomes the present value of the net income stream from the property minus the present value of the tax liability:
Copyright © by Houghton Mifflin Company. All rights reserved. 17 Capitalization, [continued] If we also recognize that public services are capitalized into value we have
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Copyright © by Houghton Mifflin Company. All rights reserved. 19 Discontent and Relief Mechanisms Reduce expenditures Homestead exemptions Preferential assessment Property tax limitations The circuit-breaker mechanism Replacing property tax revenues with other revenue sources
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Copyright © by Houghton Mifflin Company. All rights reserved. 21 Replacing the Property Tax Two issues are involved in thinking about a replacement for the property tax. First, the need to maintain revenues must be evaluated. Recall that local public schools are the primary activity funded by the property tax. Second, potential revenue replacements can be considered.
Copyright © by Houghton Mifflin Company. All rights reserved. 22