Taxes levied on property acquired in form of land and buildings are a huge source of revenue for local government in U.S.A. The value to be taxed is resolved by an evaluator according to the market worth of the property. Avoiding tax is taken to be a criminal offence in America and every owner of property is required to pay to the state some money in form of tax in regards to his property.
Property can be taken to be land, immovable property such as buildings or movable properties. The tax imposed on property varies in different countries and jurisdictions and this paper will focus on how property tax works in U.S.A (Karp and Klayman, 2003).
Origin Of Property Tax
According to Galaty and Allaway (2001), property tax dates back during the colonial times at the beginning of the Revolutionary War. During this time, the colonies had come up with different types of taxes which included capitation taxes, levied mostly on slaves and the male adults at a certain fixed rate; property taxes levied on enumerated items and according to their worth; faculty taxes levied on traders and tariffs imposed on imported or exported products.
During the war, there were complains that the taxes imposed were unfair especially property tax which was not taxed as per the value of the property but as per acre basis which favored rich land owners. It was not until the end of the war that the complaints were heard and most states started to levy taxes uniformly. Property tax began being levied on the property itself and not on the occupancy of the property owner (in rem).
Basics of Property Taxation
In order to further understand the topic, it is important to go over the basics of what property tax really entails. Since way back, imposing taxes on properties has been met with a lot of resistance from property owners. The State on the other hand relies heavily on this tax revenue imposed on the property as it serves as a major source of its income to plan their budget. It is the role of the local and state government to collect taxes on property (Sarah, 2009).
In most states in USA, the tax levied on real estate is based on the value of the property and its ownership. The tax is levied on a certain tax rate of the given value of the property.
Individual property tax is imposed in many states where the value of private properties owned inside the borders of the state is assessed on a yearly basis. The personal property in this category includes all objects of value such as vehicles and boat registration fees. Only household goods are exempted from this kind of tax.
Calculating Property Tax
The rate of property tax is calculated on a percentage or permille or millage rate. As earlier mentioned, tax on property in U.S.A is collected by the local government at both the county and municipal level. Rates vary between 0.2% and 4% depending on the state in which the property is situated in. The tax assessment officer, appointed by the local government assesses the property which is categorized into two categories. The value of the property can either be based on its improvement or the Land value itself.
To compute the duty to be levied on the assets, the calculated value is proliferated by the mill rate and then it is divided by a thousand. The tax is paid on an annual basis in most states.
The Advantage Of Property Tax In Funding The State And Local Government Services
Tyler (2000) argues that the use of property tax to fund the local government’s services has been favored by most members of the National Tax Association. This is because of the several strengths that it has been associated with to support the government.
Its main strength is based on the fact that it is one of the oldest tax systems in America. Property tax has been in existence before the Declaration of Independence and the same has continued to play a dominant role in supporting the local government. The historical reliance of this tax was due to the fact that the government did not have an alternative to finance its projects.
This was because that the general sales tax was implemented after the Great Depression onset while the Income taxes introduced a generation after the general tax sales. The government relied heavily on the tax levied on property owners.
The other reason for the government’s reliance on this tax is due to its stability. Being the oldest form of tax, it has provided a stable pillar to the local government as a source of revenue. The property rate tax is fixed according to the state that the property is situated in and therefore cannot be changed.
The government is sure to get money from property owners at a particular fixed time which makes property tax more stable than wage or sales tax. Its stability becomes more significant to the state because of the fact that property value appreciates. The appreciation of the property increases the value of the public tax revenue. Due to its future stability, the government can adjust the level of services to the locals from time to time hence being the most flexible fiscal source of income for the government.
The administration and compliance of property tax is easy and not expensive. Compliance is easy since property owners cannot hide their property from being assessed by the local government making it impossible to evade. Moreover, the property becomes the security incase of default whereby a lien is placed over the property. The lien prevents the property owner from disposing the property and if the tax accrues, then the government can sell the property to recover its tax owed and remit the remainder to the owner (Tyler, 2000).
Property tax has further been referred to as a benefits tax. This is because the revenue raised is used to support the locals and public services that serve the tax payer. The local government therefore place policies that protects the property and those that lead to the growth of the value of the property located in their jurisdictions. The public services serve the tax payer and therefore it has been argued that the tax paid by the property owner reverts back to him as a beneficiary in form of services.
Its visibility is also an advantage especially to the local government as it ensures accountability. Unlike other taxes, property tax is paid at a lump sum and the tax payer is aware of the burden he has annually and how much he pays for it. This enable the tax payer to compare the tax he remits yearly with the services offered by the local government and determine whether the services are worth.
Disadvantage of Property Tax
It is widely known that almost all American citizens are against property tax with most of them arguing that it is oppressive and not justified. In a poll activity held by Advisory Commission on Intergovernmental Relations (ACIR), it emerged that the property tax was the second tax that was disliked by citizens after the federal income tax. Several reasons have been given as to why the public dislike this tax (Cullingworth, 1993).
The tax, being more visible to the tax payer does not auger well with the public. The taxpayer receives a bill from the country each year with a lump sum amount required to be paid. The lump sum to be paid is not a voluntary act by the tax payer but rather an amount imposed on him merely due to his ownership of a property. The irony of visibility of property tax as discussed earlier is that though the tax payer dislikes it, it enhances the accountability of the local government on its spending.
Tax administration is another issue that creates distrust with the tax payers. The value of the property should be assessed as per the market value bearing the same tax burden. The issue that arises here is that some property values have been overstated for purposes of tax collection. The uneven valuations lead to inaccuracy of the exact value.
The other dissatisfaction of property tax is its shift from the commercial estate to the residential estate whereby the owners bear the larger tax burden. Many taxpayers argue that the increased tax burden does not compensate the services given by the council.
Limitations Of Property Tax From Performing Its Role
The displeasure of the public as discussed above has had its effects on the role of the property tax to fund the local government. According to Cullingworth and Caves (2003), during the 1970s and 1980s, there was a property tax revolt that resulted to major limitations on property tax. There has also been a lot of political involvement which has been biased against the tax.
There have been laws imposed for limitation of tax rates. This laws act as a hindrance of imposition of rates over a certain period of time. The laws further set a certain amount of tax, for example in California the rate tax set is one percentage. This hinders the local government from raising the rate when it is necessary to do so.
Some states have also established a limitation on property tax revenue prohibiting the tax revenue from increasing above the set revenue levels. In case of a need to increase the revenue, then two remedies have been proposed by the states.
The first remedy requires that if the revenue exceed the set level, then the tax rates should be reduced or secondly, the assessments of the property should be reduced incase of revenue increase. This condition bears a significant limitation on the local government fiscal autonomy as it hinders its increased spending.
Some states have also imposed limitations on assessed property values hindering the property valuation conducted annually from increasing beyond the set statutory limits. In California State for example, the set assessment valuation is two percentages annually unless the property is transferred.
Research conducted over the past few years indicated a reduction on reliance on property tax nationwide by the local government as its source of funding and has instead relied on other alternatives of tax.
Property Tax Variation
States in Northeast and Midwest have been known to rely more on property tax compared to the local government in the West or South. Some regions like New Jersey are considered to be the state that pays high amount of rate tax raising $16 billion in property taxes alone.
This is a high amount compared to the total revenue collected from the other taxes combined and it accounted for almost 46% of the total collection. New York on the contrary collected a minimal amount from the property tax collecting 59% of all tax revenues compared to New Jersey’s 98%. In Alabama, the state raised a mere 39% from property taxes while the Mississippi state collected 92% of their total revenue from property tax.
These variations have certain consequences in such that the citizens of the states that rely on property tax have more control over the public services of their state and stronger government systems. This acts to their advantage as they are able to control the services given by the local government in their states compared to their counterparts (Platt, 2000).
Though it is evident that there is a lot of resistance from the tax payers over property tax, the government requires a source of income to plan its expenditure and failure to tax the locals will result to decline of public services. The law should however be flexible to allow more participation by the tax payers to run the affairs of the public services.
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Cullingworth, J.B & Caves, R (2003). Planning in USA: Policies, Issues and Processes. USA: Routledge
Galaty, F & Allaway, W (2001). Modern Real Estate Practice in Ohio. Ohio: Dearborn Real Estate.
Karp, J & Klayman, E (2003). Real Estate Law. U.S.A: CengageBrain
Platt, R (2000). Land Use and Society: Geography, Law and Public Policy. Illinois: Island Press
Sarah, K (2009). Key to Economic Science and Managerial Sciences. Vol 29. USA: The University of Michigan
Tyler, N (2000). Historic Preservation: An Introduction to its History, Principles and Practice. Michigan: WW Norton