Property tax, or
millage tax, is
an
ad valorem tax that an owner is
required to pay on the value of the property being taxed. Property
tax can be defined as "generally, tax imposed by municipalities
upon owners of property within their jurisdiction based on the
value of such property."There are three species or types of
property: Land, Improvements to Land (immovable manmade objects;
i.e., buildings), and Personal (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 currency unit.) 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$ 50,000 located in a municipality with
a mill rate of 20 mills would have a property tax bill of US$ 1,000
per year.
[45555]
Countries
Australia
Australia has property taxes known as property or land rates. Land
rates and frequency of payment are determined by
local
councils. Each council has land valuers who value the land's
worth. The land's worth is the value of the land only; it does not
include existing dwellings on the property. The assessed value of
the land determines the total charges of rates. Rates can range
from $100 per quarter to $1,000 per quarter depending on the
location and value of the land. Quarterly payments are common, but
frequency varies by locality. Australian property owners also pay
water rates. Some councils include this in the total of the rates
notice and provide a breakdown of water and land charges. Other
councils may charge this separately. Water rates are not a flat
fee; charges depend on usage. Prospective buyers can get details
about land and water rates from the local council before
purchase.
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 among 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.
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.
Year of Assessment
The period of assessment is from April 1 to
March 31 of the following year.
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.
See also
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.
India
Property tax or 'house tax' is a local tax on buildings, along with
appurtenant land, and imposed on owners. It resembles the US-type
wealth tax and differs from the excise-type UK rate. The tax power
is vested in the states and it is delegated by law to the local
bodies, specifying the valuation method, rate band, and collection
procedures. The tax base is the annual ratable value (ARV) or
area-based rating. Owner-occupied and other properties not
producing rent are assessed on cost and then converted into ARV by
applying a percentage of cost, usually six percent. Vacant land is
generally exempt. Central government properties are exempt. Instead
a 'service charge' is permissible under executive order. Properties
of foreign missions also enjoy tax exemption without an insistence
for reciprocity. The tax is usually accompanied by a number of
service taxes, e.g., water tax, drainage tax, conservancy
(sanitation) tax, lighting tax, all using the same tax base. The
rate structure is flat on rural (panchayat) properties, but in the
urban (municipal) areas it is mildly progressive with about 80% of
assessments falling in the first two slabs. By all accounts, the
property tax is under-utilised in the municipalities and not
effectively used in the panchayats, mainly due to tax payer
resistance.
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.
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.
United States
In the
United
States, property tax on real estate is usually levied by local government, at the municipal or county level.
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.
When assessing a residence, the appraiser investigates the selling
prices of all other similar houses in the county, the cost of
replacing it if it gets destroyed, and the most appropriate price
that the house should sell for. Then, the appraiser assigns a value
which typically lies within this calculated range.
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 (commonly called
Assessor's Parcel Numbers, or
APNs). 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. One example of proposed reform is to create a
"two-rate" property and
land value
tax.
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 , 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.
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
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.
Some exemptions are available to homeowners in certain counties. In
California, some counties, such as Los Angeles, Ventura, and San
Diego, offer a homeowners exemption for property owners that live
in the home.
In Texas, property taxes are used to fund
public school
districts.
Effects
Sprawl
In the absence of 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.
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.
[45556] 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 can be subject
to property taxes as well. If the tax reduces the supply of housing
units, then it will increase the rental price. In this way, the
owner's cost of taxation is passed on to the renter
(occupant).
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 reassessed as
well as new owners and thus are required to pay taxes on property
the value of which is determined by market forces, such as
gentrification in low income areas of a city.
In an effort to relieve the frequently large tax burdens on
existing owners, particularly those with fixed incomes such as the
elderly and those who have lost their jobs, 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.
[45557] 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.
[45558][45559]
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.
[45560] The bill passed unanimously in the Maryland
House of Delegates and Senate and was signed into law by the
Governor.
[45561]
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."
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.
[45562]
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.
Milton Friedman noted that "[T]he
property tax is one of the least bad taxes, because it’s levied on
something that cannot be produced — that part that is levied on the
land".
See also
References
External links