Project 01 Flashcards
Proposition 13 in comparison to ad valorem tax system
Administration
The ad valorem system is simple and efficient; easily understood by taxpayers – pay on basis of market value.
Proposition 13 is very complicated with a series of rules; the system is based more on legality than as a tax on wealth. It is much more difficult and expensive to administer and is prone to errors.
Accountability
The ad valorem system has no hidden or complicated rules. There is a clear relationship between the value of one’s property and proportionate share of one’s tax burden.
Proposition 13 created a system where one’s proportionate share of the tax burden depends on when the property was purchased and who it was purchased from (e.g., transfer between unrelated or related parties). Under Proposition 13, only a small percentage of properties sell each year and therefore most taxpayers will be subject to assessments that are below current market values. This majority will be paying less taxes than the minority who are at current market values. This may lead to the majority demanding increased services from the city because they will not have to bear their fair share of the costs. Accountability is lacking.
Neutrality
The property tax is typically too small to create an incentive for homeowners to act in a certain way. Proposition 13 however, has created an incentive for people to avoid a revaluation by declaring a false sale price, transferring the property between related parties (e.g., by adopting the purchaser), or minimizing the stated sale price with creative financing.
Fairness
The ad valorem system is equitable in horizontal as well as vertical terms. Owners of equally valued property are treated equally and owners with higher valued properties pay more of the tax burden.
Proposition 13 is inequitable; there is no relationship between the value of one’s property and the amount of taxes paid.
Stable tax base
The ad valorem system leads to a stable tax base although tax shifts can cause problems if properties change in value at different rates.
Proposition 13 created a severe drain on this most important revenue source for the municipalities of California. They are forced to rely more on state funding and therefore lose autonomy and control. The amount of taxes available in any given year depends on the number of property transfers taking place.
From the point of view of property owners however, their property taxes stay the same so long as they do not sell their property and purchase another property.
Evaluate a policy which sets limits on assessment increases.
Is it a suitable solution to the problem of tax shifts?
There is no economic justification for a policy that prevents tax shifts. An ad valorem tax is designed as a tax on wealth and therefore “wealthier” property owners (those who own higher valued properties) should pay a larger share of the tax burden.
A system which limits assessment increases distorts the ad valorem tax as a tax on wealth. Thus, the relationship between the value of one’s property and one’s share of the tax burden is “watered down”.
Limiting assessment increases has the effect of supplying a subsidy to those owning properties that have experienced large increases in value at the expense of those owning properties that have not experienced large increases in value.
If the tax shift is permanent, or very long term, and assistance is provided more than once, it will be difficult to remove and return to a true ad valorem system.
Potential Solution
The municipality being affected should identify the goals of any policy to provide assistance. If the policy is designed to assist those on fixed incomes, the taxpayer’s income should become a qualifier for assistance. In this way, only those who require assistance are targeted. Without an income qualifier, high and low-income individuals are assisted.
Do you agree with this statement : “The assessor should not be involved with property tax policy or public relations with respect to assessment and property taxation system.”
Reasons for agreement
The job of the assessor should be nonpartisan. As property taxes can be a very political issue, the assessor should not be involved at the political level.
The assessor can be seen to be independent of political manipulation.
Reasons for disagreement
The property tax is frequently misunderstood. The assessor can provide a level of expertise that other interested groups cannot.
The assessor has a professional interest in maintaining or achieving a property assessment and taxation system that strives to meet the principles of a good system.
