CHAP 01 REVIEW Q&A Flashcards
Explain the property taxation principles of ability-to-pay and benefit received.
Provide two examples (one each) of situations where these principles are followed in raising local government revenue.
Ability-to-pay
Taxpayers should pay taxes according to their ability. The property tax is a tax on wealth where ability is measured by the “wealth” of the taxpayer - the value of their real property.
Example: ad valorem property taxes.
Benefits received
Taxpayers should pay taxes according to the benefits they receive. For example, those who use recreational facilities or require garbage pickup should pay separately for these benefits. Typically fees only cover a portion of the cost of providing the local government service.
Example: user fees of any kind.
Is the incidence of property taxation progressive, regressive, or neutral?
Provide reasons for your answer.
The incidence of taxation depends on your point of view.
If the property tax is viewed as tax on the consumption of real property, it appears to be regressive.
This is because individuals with lower incomes spend a greater proportion of their income on housing.
However, if income is measured as permanent income (a measure of current and future income) the property tax as a tax on consumption appears to be proportional at minimum.
If the tax is measured against equity rather than value, it appears to be even more progressive.
This occurs because the elderly taxpayers, although on fixed incomes, typically have a great deal of equity in their homes.
Furthermore, regressivity in the property tax is frequently caused by poor assessment administration, such as assessments that are not at market value, and not the tax system itself.
If the property tax is viewed as a tax on capital, it appears progressive.
This is because higher income taxpayers spend proportionately more of their income on capital than lower income taxpayers.
What are the expected benefits of site value taxation as put forward by the proponents of this system?
Under what circumstances do you feel site value taxation would be appropriate?
Proponents for site value taxation base their support on the allocative efficiency of the tax - the taxation of land only should promote development, redevelopment, and lead to the highest and best use of the land.
This is based on two separate theories : the liquidity effect and the incentive effect.
- The Liquidity Effect.
This theory states that under land value taxation, the increased holding costs will provide an incentive for landowners to develop or sell property. A pure land tax will also decrease the value of land as the tax is capitalized into the value of the land. These two effects should make land more saleable, or liquid.
- The incentive effect.
The incentive effect holds that a reduction in the tax on improvements will lead to an increase in the supply of improvements. Land is fixed in supply and therefore a tax on land will not affect the amount of land supplied. Demand for improvements, however, is elastic. The more elastic the demand, the greater the effect land value taxation will have on the supply of improvements.
Advocates for land value taxation argue that the liquidity and the incentive effects will reduce urban sprawl, lessen inner city decline, and provide incentive to develop land to its highest and best use.
Circumstances where site value taxation could be appropriate include areas in which rapid development is desired, for example in new and growing cities or in the declining neighbourhoods of inner cities.
