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

Chapter 12


THE ECONOMICS OF REAL PROPERTY TAXATION

Government levies taxes to generate revenue

Other sources of revenue:FinesFeesborrowing


The Principles of Taxation

The Taxing ProcessA 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.


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.


Two Major Taxation Philosophies Ability to pay

Benefits received


Both philosophies have problemsHigher taxes stifle incentive

Cause people to seek tax loopholes

Only benefit a portion of society

Cause conflicts between rich & poor


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.


The Burden of Income TaxPersonal 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.


Local Government Uses of Property Taxes

Need to obtain revenueProperty taxes do not fluctuate as much as

sales and income taxes.Provides a stable source of revenue


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.


Value Loss Caused by Property Tax IncreaseBefore After Change

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% 10% none

Value Estimate $100,000 $99,000 $1,000 loss


Net IncomeCapitalization Rate

= Value Estimate

How Real Property Taxes Influence Land UseReligious, 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.


How Real Property Taxes Influence Land UseReducing 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.


Several Real Property Tax Reform Proposals

Exemptions for low income individualsExemptions for homeownersUpdating the professional skills of the

Assessor’s OfficePlacing limits on property taxes


Real Property Tax Reform

Additional TaxesSpecial assessments like a sewer assessment

district Inheritance taxesGift taxes income taxesTransfer taxesSeverance taxes on natural resources


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


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

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