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Property Taxation in Government Finance

4 min readBy: C. Lowell Harriss

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Research Publication No. 31

Executive Summary
Property taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. ation, yielding $47.2 billion in 1973 and estimated to reach $51 billion in 1974, continues to be a major source of revenue e for local governments. Their viability and independence may well depend upon their ability to utilize this source, one not used at all by the Federal government and only slightly by a few states.

Administration in most states is a local responsibility and property taxation differs not only from state to state but within states. In much of the country inequality of assessment continues to be high, but in some places substantial progress has been made in reducing disparities. Economically, “the” property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. consists of two markedly different elements.

One bears on land, the other on manmade capital such as buildings, equipment, and inventories. Because the supply of land is largely fixed by nature, economists conclude that the tax on pure land values is capitalized into lower land prices and rests on the owner of the land. In contrast, the tax on man-made capital will influence the quantity of the productive resource, including housing and public utility facilities. The cost to businesses and the suppliers of rental housing is shiftable to the user; taxes which may not be passed on to the consumer will reduce the after-tax net returns to investors and will thus rest on the suppliers of capital.

Whether the burden of the property tax is predominantly proportional with income, bear relatively more heavily on lower-income families (regressive), or increases as a percentage of income up the income scale (progressive) remains subject to debate. Facts undoubtedly differ from one community to another as do the magnitudes of the burdens.

Recent relief provisions moderate, sometimes substantially, the burden on lower-income families, especially those over age 65. The 1973 per-capita national total for property taxes was $225, an average that included per-capita amounts over $275 in five states and under $125 in 16 states. In areas containing most of the country’s assessed valuation, the annual tax exceeds 2 percent a year of full capital value. In many places the rate is over 3 percent and in places such as Newark, Boston, and New York City it is over 5 percent.

The rates for much of the country are high enough to have effects which are significant beyond the revenue yielded. The tax influences the use of land, competition for new industry, community growth, and the maintenance and modernization of housing and business facilities. High tax rates increase pressures for exemption and may powerfully affect incentives for zoning and other determinants of development over metropolitan areas. Because of the local nature of property taxation, including administration, the effects (other than revenue yield) differ from one area to another. But relatively heavy burdens—such as 3 or 4 percent a year on full man-made capital must deter construction of new housing and business facilities.

Property tax rates when expressed as a percentage may seem small. But they apply to capital values each year. Therefore, comparison of property tax rates with income or sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. rates can be deceiving. A 3 percent property tax equals 33 percent of the pre-tax income from a property which yields 6 percent to the owner. The property tax is half the yield after tax. An increase of 0 .5 percentage point would reduce the amount remaining after tax in such a case by one-twelfth, equal to an income tax rise of about 8 percent.

Opportunities for improving property taxation include many aspects of administration. Achievements in several places demonstrate that assessment can meet standards very much higher than are being tolerated in most of the country. Actual assessments are made in around 14,000 separate jurisdictions. Most are much too small. Staffing conditions differ tremendously.

Proposals for basic restructuring of the tax have support which rests on widely accepted economic analysis. Tax rates on man-made capital would be reduced and much more of the revenue needs would be met from tax on land values. One result would be encouragement of modernization and expansion of housing and new production facilities.

Furthermore, local treasuries would get more of the fruits of community development (“unearned increments” as distinguished from values which result from inputs of effort and capital); this result would conform to some concepts of tax equity and justice. Owners of land would be under more pressure to put it to “higher and better use,” as contrasted with “underuse” which may be dominated by hope for speculative gain due to community growth.