The Property Tax …
in Theory and Practice
Enid Slack
Institute on Municipal Finance and Governance
Munk School of Global Affairs
University of Toronto
Presentation to the 6th Symposium on Fiscal Federalism
on Financing Local Governments
Barcelona, 14 – 15 June, 2010
The Property Tax … in Theory and
Practice
„
„
„
„
„
The residential property tax is a good tax for
local government … in theory
The non-residential property tax is not as
good a tax for local government … in theory
Property taxes are not widely used in many
OECD countries
What are the problems with the property tax
in practice?
Can it be fixed? What needs to be done?
2
The residential property tax is a good
tax in theory
„
„
„
„
Benefits received: connection between local
services and property values
Immovable: difficult to evade tax
Local autonomy: to the extent that only local
governments levy the tax
Visibility and accountability: visibility makes
governments accountable
3
The non-residential property tax is not
a good local tax
„
„
„
„
Benefits received: taxes generally exceed the
benefits received from local services
Capital mobility: business more mobile than
residents
Accountability: tax exporting reduces
accountability
Tax competition to attract business (diverts
tax base from poorer areas)
4
Property taxes are not widely used in
OECD countries
„
Property taxes relative to GDP
„
Property taxes relative to total taxes
„
Property taxes by level of government
„
Distribution of local tax revenues
5
Property Taxes Relative to GDP, Federal OECD
Countries, 2008
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Australia Austria Belgium Canada Germany Mexico
Spain Switzerland
US
6
Property Taxes Relative to GDP, Selected Unitary
OECD Countries, 2008
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
7
Property Taxes Relative to GDP, Selected Unitary
OECD Countries, 2008
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
8
Property Taxes Relative to Total Taxes, Federal
OECD Countries, 2008
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Australia Austria Belgium Canada Germany Mexico
Spain Switzerland
US
9
Property Taxes Relative to Total Taxes, Selected Unitary
OECD Countries, 2008
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
10
Property Taxes Relative to Total Taxes, Selected
Unitary OECD Countries, 2008
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
11
Property Taxes by Level of Government, Federal
OECD Countries, 2007
100%
80%
60%
40%
20%
Federal
Governm ent
State/Regional
Governm ent
Local
Governm ent
0%
12
Distribution of Local Government Tax Revenues,
Federal OECD Countries, 2007
100%
80%
Taxes on income, profits
and capital gains
60%
Taxes on payroll and
workforce
40%
Real property taxes
20%
Other property-related
taxes
0%
Taxes on goods and
services
Other taxes
13
Distribution of Local Government Tax Revenues,
Selected Unitary OECD Countries, 2007
100%
80%
Taxes on incom e, profits
and capital gains
60%
Taxes on payroll and
workforce
40%
Real property taxes
20%
Other property-related taxes
0%
Taxes on goods and
services
Other taxes
14
Distribution of Local Government Tax Revenues,
Selected Unitary OECD Countries, 2007
100%
80%
Taxes on income, profits and
capital gains
60%
Taxes on payroll and
workforce
40%
Real property taxes
20%
Other property-related taxes
0%
Taxes on goods and
services
Other taxes
15
Distribution of Local Government Tax Revenues,
Selected Unitary OECD Countries, 2007
100%
80%
60%
40%
Taxes on income, profits
and capital gains
Taxes on payroll and
workforce
Real property taxes
20%
Other property-related taxes
0%
Taxes on goods and
services
Other taxes
16
Dependence on the Property Tax
„
Dependence on property tax varies with:
‰
‰
‰
‰
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Expenditure responsibilities assigned to local
government
Other revenues available (intergovernmental
transfers, user fees, other taxes)
Size and growth of tax base
Degree of freedom local governments have with
respect to property taxation (tax base and rates)
Willingness to enforce tax
17
Property Taxes Relative to GDP
(T*/GDP)
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MV/GDP – market values to GDP (little
government control)
AV/MV – assessed base to market values
(assessment ratio)
TV/AV – taxable base to assessed base
(exemptions)
T/TV – taxes to taxable base (statutory tax rate)
T*/T – taxes collected to taxes assessed
(enforcement)
18
What are the problems with the
property tax in practice?
„
The property tax is inelastic
‰
„
Greater accountability but greater taxpayer
resistance
The property tax is badly administered
‰
‰
Arbitrary process of assigning values to properties
in market value system
Infrequent reassessments
„
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opposition from taxpayers who benefit from status quo
cost of reappraisals
19
T ab le 2: C o m pa riso n of P r ope rty T a x S ys te m s in S elec te d E ur ope an C o un tr ie s
C o u n tr y
T ax
Lan d
X
T ax a b le item
B u ild in g s
Pla n t
X
A u str ia
R ea l es tate ta x
B elg iu m
R ev e n u c ad as tr al
X
D en m ar k
C o u n ty re al e state tax
M u n ic ip al r eal es ta te
tax
T ax o n co m m ’ l b ld g s .
R ea l p r o p er ty ta x
P r op er ty tax
P r op er ty an d lan d ta x
B u s in ess ta x
X
G er m an y
R ea l es tate ta x
X
X
Ir ela nd
R ate s
X
X
Ita ly
X
X
X
X
X
X
X
X
Sp ain
S w ed en
C o m m u n al r eal e state
tax
O n r o er en d G o ed b elastin g
W ate rs ch ap lev y
I m mo va b le p ro p e rty
tax
Lo c al p r o p e rty ta x
R ea l es tate ta x
X
X
X
S w itz er la n d
M u n ic ip al b u s in ess ta x
X
X
En g lan d an d
W ales
Sc o tlan d
N o n - d o m estic r ates
C o u n c il tax
N o n - d o m estic r ates
C o u n c il tax
X
X
X
X
X
Fin la nd
Fr an c e
N eth er lan d s
P o rtu g al
X
X
B a sis o f V al ua tio n
R en tal
C ap ital
A r ea
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
R ev alu atio n s
V alu es ar e
in d e x ed
1 0 y ear s ;
p o stp o n ed
4 y ear s ; an n u a l
in d e x atio n
A n n u al
3 y ear s b u t
r ev a lua tio n s h av e
b een p o stp o n ed ;
a n n u al in d e x atio n
6 y ear s b u t n o
r ev a lua tio n s in ce
1 964
5 -1 0 y ear r o llin g
r ev a lua tio n s
N o t s p ecif ie d
4 -y ea r r o llin g
r ev a lua tio n
X
X
A n n u al in d e x atio n
X
X
X
X
X
X
X
X
X
A n n u al in d e x atio n
4 -y ea r r o llin g
r ev a lua tio n s
A n n u al – b a sed o n
r en t an d p ro fit
5 y ear s
N o t s p ecif ie d
5 y ear s
N o t s p ecif ie d
So urce: B ro w n and H e p w orth (20 02 ), A lm y (20 01 )
20
What are the problems with the
property tax in practice?
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The tax base is being eroded
‰
‰
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Exemptions (e.g. churches, schools, government)
Tax base limits; tax limits (especially in US)
The property tax rate is low
‰
‰
Rates generally between 0.5% and 1.0%
The property tax is unpopular:
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„
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Visibility
Volatility of market value system
Enforcement can be costly in terms of resources
and politics
21
What can be done?
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Good administration e.g. assessment, billing,
collection, appeal mechanism
Regular reassessments
Phase in of tax increases arising from
reassessments BUT resist assessment limits
Public education e.g. assessment increase
overall does not necessarily mean tax
increase; services funded by property tax
Property tax relief for low-income taxpayers
22
Final Comments
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„
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Property tax is two separate taxes –
residential and non-residential
Residential property tax is a good tax for local
governments … in theory
Local governments may not be able to
finance range and level of public activities
solely from the property tax
Property tax is difficult to reform … politics
outweigh economics
23