Effective Property Tax Rate

1. Effective Property Tax Rate LECTURE AT XIAMEN UNIVERSITY LECTURER: JACK WEN-CHIEH WU ASSOCIATE PROFESSOR, DEPARTMENT OF PUBLIC FINANCE, NATIONAL CHENGCHI UNIVERSITY

2. Outline • Overview of Property Tax • Split-rate Property Tax System in Taiwan • Measuring Effective Property Tax Rate for Taipei • The Link Between Effective Property Tax Rate and Property Characteristics

3. Property 財產 v.s. Wealth 財富 • Property: something that someone owns • Wealth:the money value of property • Property can be classified as: • Personal (Movable) property 動產 v.s. Real property 不動產 • Tangible有形 property v.s. Intangible無形 property

4. Narrowly Defined Property Tax • Property tax is the tax on the property holding. • Property tax is an ad valorem tax that an owner of real estate or other property pays on the value of the thing taxed. (note: it is difficult to levy a tax on personal or movable property) • The combination of land and improvements (building)is normally termed as real estate, real property or realty.

5. Broadly Defined Property Tax • According to OECD classification, taxes on property include: 1.taxes on immovable property 2.taxes on net wealth 3.Estate, Inheritance, and gift taxes 4.Taxes on financial and capital transactions 5.Others

6. Property Tax Base • Market value of property The tax base of property tax is supposed to be the market value of property • Assessment value of property: Not all of properties are not transacted in the market in the given year, so it is necessary to assess the value of property annually by tax assessors.

7. Valuation Methods • Market Value approach 市場價值比較法 • Income capitalization approach 所得還原法 • Replacement cost approach重置成本法

8. Market Value Approach Use the observed market prices for properties to estimate value for a subject property. • Suppose that we want to value a three bedroom, two bath home in the Dogwood Subdivision. • We could analyze the sales prices for all such comparable homes over the past year to value the subject property.

9. Income Capitalization Approach For income producing properties, we can estimate value by computing the discounted present value of the net income stream generated by the properties. • We need information on net income to do this.

10. Replacement Cost Approach To estimate the value of property by computing the replacement cost and subtracting depreciation. • This is the only alternative for unique properties, or properties for which an active market has not developed, or for which no net income data is available.

11. Assessment Ratio Rule • An assessor computes the assessed value of each piece of property from an estimate of the property’s market value according to a specific set of procedures , usually established by law. Given that estimate of market value, the assessed value is specified by law or common practice as some specific percentage of market value, called the assessment ratio rule, or at least must be within some specified range of percentage of market value.

12. Property Tax Rate • Central laws constrain the local government in setting the property tax rate by limiting the tax rate, property tax revenue, or both. • Single-Rate Tax System: A single-rate property tax system imposes the same tax rate on land value and building value. • Split-Rate Tax System: A split-rate property tax system imposes two different tax rates on land value and building value.

13. Nominal Property Tax Rates • The nominal tax rate is t = T/Va T the tax paid Va the assessed value • The assessed value Va is a fraction of the market value. Let a the assessment ratio, Va = aV a = Va/V.

14. Effective Property Tax Rate • The effective tax rate is the ratio of the tax paid to the market value of the property: t= T/V. • Substitution for V gives the relationship t= at. Hence, the effective tax rate is a combination of the nominal tax rate and the assessment ratio.

15. Evidence from USA

16. More Evidence from USA

17. Evidence from EU

18. Split-Rate Property Tax System in Taiwan • Taiwan’s property taxes on the value of real estate currently include taxes on both the value of land and the value of its improvements (i.e. building attached to the land). • Tax on the value of land is called Land Value Tax地價稅. • Tax on the value of building attached to land is called house tax房屋稅.

19. Taiwan’s Property Taxes

20. Taiwan Tax System

21. Land Value Tax (LVT) • Land value tax is an ad valorem tax in which only the land value is taxed. Both buildings and improvements are ignored. • It is imposed on the land that has been assessed and assigned a value. However, there are no land value taxes on farmlands.

22. Land Value Assessment Commission • Local levels of government are supposed to establish a “Land Value Assessment Commission”. The commission has to make public announcements on their assessments of land values by section and lot based on data submitted by the land administration-in-charge.

23. Legal Declaration Process • Land owners ought to declare their land value. • If an owner does not declare the land value or his declared value is less than 80% of posted value, then the official declared value should be adjusted to 80% of posted value. On the other hand, if the declared value is more than 120% of posted value, the official declared value should be adjusted to 120% of posted value.

24. Land Value Tax Rates • There are two rates for land value tax: regular progressive tax rate and privileged rate. • The progressive rates are ranged between 1% and 5.5%. • It is tax free when the value of land is lower than the starting threshold (ST). However, if the land value is more than 20 times of starting threshold, the marginal tax rate is 5.5%.

25. Progressive Rates of Land Value Tax

26. Privileged Tax Rates • The tax rate is 0.2% for those lands which are used for owner-occupied housing, public housing, business’s labor dormitory. • The tax rate is uniformly 1% for those lands which are directly used for the approved business purposes • The land value tax of publicly-owned land used for public purposes is fully exempted.

27. House Tax • In 1943, towns with more than 500 households were permitted to tax values of houses (or rents of rental houses) at a rate of no more than 5%. In 1967, the House Tax Act was formally promulgated. • The house tax should be levied on all houses attached to land.

28. Tax Base of House Tax • The house tax is levied based on the current (present ) value of a house. • The standard value of a house is assessed by the real estate assessment committee comprising of officers, experts in construction techniques, and representatives of local people’s assembly. It should be publicly announced by the local governments. Standard values of taxable houses have to be re-assessed every three years.

29. Legal Declaration Process • Within a month after the completion of construction of a house, the taxpayer should declare its current value and report its use to the local collection authority-in-charge. The local tax authority should calculate the current value of a house based on the taxpayer’s declaration and the assessment made by real estate assessment committee. If the taxpayers disagree with calculated current value provided by local tax authority, they can file a request for re-calculation by presenting more documentary evidences.

30. Tax Rates of House Tax • The house tax is one of major local taxes, so the House Tax Act only sets up maximum and minimum tax rates and let local government decide its actual tax rates. • Tax rates vary across different purposes for which houses are used.

31. House Tax Rates

32. Tax Exemption and Reduction • No house tax should be levied on public buildings used as office buildings of government agencies, public schools, and so on. • No house tax should be levied on any of the following private buildings: school buildings owned by a private school, office buildings owned by a private charitable and non-profit organization, and so on. • The house tax on the following private houses should be reduced by half: dwelling houses sold by the government to people in need at lower prices, buildings owned by a factory duly registered according to law and used directly for production, and so on.

33. Split-rate Property Tax System • Taiwan has always adopted a split-rate system since the property tax system was established. • The split-rate property tax system is not yet popular in the United States even though a number of cities in the rest of the world have adopted such a system.

34. Split-Rate System in USA • An increasing number of researchers and policy makers in the United States propose that land should be taxed at a higher rate than building for the purposes of providing market incentives for urban development and renewal in the USA (e.g. Hartzok, 1997) and a number studies (e.g. Cohen and Coughlin, 2005; Banzhaf and Lavery, 2010) have found potential benefits of such a property tax reform, but only a few jurisdictions mainly in the Pennsylvania have so far adopted this type of property tax system (England and Zhao, 2004).

35. Features of Split-rate Property Tax System In Taiwan • One of important features is that its two-rate taxation practice violates the common rule that land should be taxed at a higher rate than building. • For example: the value of land used for the residential purpose is taxed only at 0.2%, while the value of building for residential purpose is taxed at 1.2%.

36. Features of Split-rate Property Tax System: Continued • The second important feature is that both land value and building value are assessed by two different appraisal committees organized by two different government departments. Moreover, value assessors from these two committees use different appraisal techniques. Two different committees are mutually independent and do not cooperate with each other, so systematic assessment errors made by tax assessors from two departments are expected to be more significant.

37. Effective Property Tax Rate for Split-Rate System • It is necessary to estimate a single nominal property tax rate by integrating two tax rates. • It is necessary to estimate an assessment ratio by using two assessment values.

38. Potential Problems of Estimating Effective Tax Rate • The first potential problem is related to the arbitrary rule used in estimating a single nominal property tax rate. The arbitrary rule is based on the percentage of property value represented by land value. • The second potential problem is related to the availabilities of the assessed value and the true market value.

39. Data • The property data we use in this study are provided by a leading commercial bank in Taiwan. The buyers of individual properties covered in this data made mortgage loans from this commercial bank when these properties were transacted between 2002 and 2006. • We only choose the owner-occupied residential properties located in Taipei as our samples. The sample size is 9,381.

40. Effective Tax Rates at Individual Level

41. Taipei City

42. Basic Profile

43. Effective Tax Rate

44. Assessment Ratio

45. Effective Property Tax Rate and Property Characteristics • Due to the assessment biases, the assessed value of property is often poorly corresponded to the true market value of property. • In fact, the systematic errors made by the tax assessors also largely increase the assessment biases.

46. the Link Between Systematic Assessment Errors and Property Characteristics • A line of literature (e.g. Thrall, 1979; Berry and Bednarz, 1975; Kowalski, and Colwell, 1986; Haurin, 1988; Goolsby, 1997; De Cesare and Ruddock, 1998; Allen and Dare, 2002; Harris and Lehman, 2001) has argued that a vector of property characteristics, such as property value, property age, property type, floor area, site area, and geographic location, are key factors accounting for systematic assessment errors made by tax assessors.

47. Arguments • They argue that tax assessors tend to systematically undervalue the high-priced property, the older property, and the property at the fringe of central business district, or at the urban periphery, or at suburban area. Moreover, they argue that tax assessors tend to systematically over-assess the values of larger property, and the property with a larger percentage of value represented by land value, and the property in an area containing residents of low income and high population density.

48. Assessment Ratio and Systematic Assessment Errors • The assessment ratio of property is largely determined by the systematic assessment errors made by tax assessors. When the systematic errors are larger, the assessment ratio of property differs significantly from one. The systematic errors made by tax assessors are closely associated with property characteristics, so the assessment ratio of property should be also closely related to property characteristics.

49. Empirical Evidence on the Link Between Assessment Ratio and Property Characteristics • Goolsby (1997) empirically explores the potential impacts of a vector of property characteristics on the assessment ratio of the property. He finds that sale price and property age have negative impacts on the assessment ratio of property, while property size and land value ratio have positive impacts on the assessment ratio of property. • Allen and Dare (2002) and Cornia and Slade (2005) also employ a vector of property characteristics to account for the horizontal assessment ratio inequality

50. The Link Between Effective Tax Rate and Property Characteristics • The effective property tax rate is defined as the ratio of actual property tax payment to true market value of property. The nominal property tax rate is basically homogeneous among properties within the same jurisdiction, so it is independent of property characteristics. As mentioned earlier, the assessment ratio of property can be accounted for by a vector of property characteristics. Therefore, we argue that the effective property tax rate paid by a property should be dependent of a vector of property characteristics as well.