PROPERTY TAX

a levy that is imposed upon real propertybasically land and buildingsand, in some countries, on business and farm equipment and inventories and that is imposed on such personal property as automobiles, jewelry, furniture, tools, and even intangibles such as bonds, mortgages, and shares of stock. In most countries, property taxes are used by local or provincial, rather than national, governments and supply to them a significant proportion of total tax revenues. The taxes of the ancient world were originally land taxes based on area rather than on value. Later, gross output came to serve as the base, and gradually other forms of wealth, such as farmhouses, animals, and implements, were included. The property tax is ultimately a tax upon persons; property serves only as the basis of assessment. The administration of property tax involves the discovery or identification of the property to be taxed, its valuation, the application of the appropriate tax rate, and its collection. Problems arise in determining what property actually exists in a physical sense and the value of the property. Inequities in evaluating different kinds of property or property bearing different kinds of improvements are continuing problems of administration, especially for local governments that may lack expertise in such matters. In general the property tax seems to be either roughly proportional to income or slightly regressive. Although property taxes may burden persons with low incomes more than strictly proportionally, their total redistributive effect from higher to lower income groups is substantial when account is taken of the degree to which property taxes pay for schools and other services used by low-income groups. There is also widespread horizontal inequity in property taxes because of unequal assessment upon owners. The tax falls more heavily on some kinds of businesses (e.g., railroads and other utilities) and some types of consumption (e.g., housing) than on others. Property taxation has several economic effects. A community with high tax rates on buildings will be at a disadvantage in the competition for construction capital unless it can offer compensatory advantages. The tax on buildings and property other than land can distort resource allocation, by discouraging improvements that would bring land to its highest use. Lower tax rates on the fringes of urban areas encourage suburbanization. High taxes on structures favour horizontal over vertical growth of metropolitan areas. Property taxes continue in use because they are easily administered and very difficult to evade, and because the tax baselandis a permanent and fixed resource. levy that is imposed primarily upon land and buildings. In some countries, including the United States, the tax is also levied upon business and farm equipment and inventories. Sometimes the tax extends to automobiles, jewelry, furniture, and even to such intangibles as bonds, mortgages, and shares of stock that represent claims on, or ownership of, tangible wealth. The amount payable is based not on a person's or a company's total net wealth but on gross value without regard to debts. Levies not ordinarily classified as property taxes are those on transfer of property (by sale, gift, or death), on net wealth, and on capital; special charges for some public service or improvement (such as special assessments in the United States); certain types of agricultural imposts; and portions of income taxes that apply to presumed or actual yield of farm or urban land. The three principal approaches to the assessment of property are rental value, capital value, and market value. Most Asian countries use annual rental value as the basis of assessment. Under this principle, the tax is based on the average gross-rental income the property is expected to generate under prevailing market conditions. A common approach to the assessment of real property in European countries is that of capital value. The traditional idea is that capital value can be estimated on the basis of rental values, treating them as earnings on capital. Most European countries, however, as well as the United States, endeavour to assess property according to its market value. Some Asian countries employ a fourth, less complex but less fair approach. They simply collect a fixed amount based on a particular unit of land measurement. Laos collects a specific amount per square metre of land. In West Malaysia the annual tax on land is a certain amount per 1,000 square feet. The scope of the tax in different countries varies greatly, depending upon legal factors, administrative realities, tradition, availability of other sources of revenue, the organization of governmentespecially the relative role of local government, for which this levy is of key significanceand the public services provided. The attempt to extend the tax to other than real property (land and buildings) is almost unique to the United States. There is a strong argument in principle for broad coverage of tangible property, since otherwise the tax discriminates (is not neutral) among types of consumption and investment. Administrative difficulties limit what is possible in practice. Classification of property by different types has served as a basis for varying the effective burdens, sometimes by providing for the exclusion of a fraction of the value of some kinds of property (machinery, forests, mines, securities, furniture, etc.), sometimes by adjusting the rates of tax. In a simple agrarian economy composed of homogeneous households, property taxation might be thought to provide a fairly good indicator of both ability to pay and benefits from public services. In a complex urban, industrial society this may no longer be true; the practical administrative advantages of taxing immobile real estate may go further than tax principles in explaining the prevalence of this tax. In most countries, property taxes are used by local or state rather than national governments. Property tax receipts supplied about half of the revenue raised by local governments in the United States. Throughout much of Europe and Latin America and parts of Africa and Asia, one finds taxes that may be broadly classified as property taxes in their functioning and that supply significant proportions of total tax revenue. In several countries the property tax applies in fact primarily to urban real property. The intensity of use varies widely. In some countries, property tax revenues have lagged far behind the growth of national income because the tax has been based on measures that have not responded to changes in the general level of prices. The original land surveys were designed to serve for long periods, and the taxes were based on surface area or presumed income at rates that might have served moderately well in a world of stable property values. War, inflation, and other forces, however, have made them obsolete; and popular resistance and lack of administrative capacity have generally prevented their modernization. Additional reading Dick Netzer, Economics of the Property Tax (1966); Henry J. Aaron, Who Pays the Property Tax?: A New View (1975). Charles E. McLure, Jr.