but the earnings, illustrated by somerailroads, may be nonexistent or so lo was to justify at the most a value whichwould be only a fraction of cost minu snormal depreciation . When a utilityoperates in many localities or states, thetotal worth of the corporation may b eestimated by some satisfactory methodsuch as capitalization of earnings . Buthow can the total be properly appor-tioned among various states or locali-ties? Where should planes flying com-mercially over many states, or interstat etrucking equipment, be taxed ?

Financial institutions present a spa-cial problem because of holdings o fsecurities. On their buildings andequipment, including expensive com-puters, they can be taxed on the sam ebasis as other businesses . Difficultiesarose when the law presumably applie dproperty tax to such intangible prop-erty as bonds, mortgages, shares o fstock, and bank accounts . For mostfamilies and businesses the law wasnot in fact applied to such property ;when it was, grossly understated valuesmay have been accepted . But responsi-ble financial institutions whose record sare open to the public would not b eable to assert that a high quality $1,00 0bond with a market value of $1,000 i sactually worth, say $150 . To be taxed a trates applying generally would impos eimpossibly heavy burdens : a tax rateof 30 mills (3 percent) would take hal fof the total income of a 6 percent mort-gage or other security .

Various methods have been devel-oped to deal with the special problems

presented by the types of businesse snoted in this section . Modifications ofad valorem property taxation may beused. Some states use a form of grossreceipts tax for utilities. Insurance com -panies, in addition to taxes on tangibleproperty, pay taxes on premiums .

Constitutional and Statutory Ceilingson Property Tax Rates

By provision of the state constitutio nor statutes, most states impose somelimits on property tax rates . Localitiesare not free to impose property taxeswithout restriction . Practices and de-tails, including those affecting th epower of voters to approve rates abovesome limit, differ widely . The rate limitmay apply to actual assessments or t othose figures adjusted according t osome equalizing figure as discussedlater .

The restrictions may apply to someunits of government and not to otherswhen there is overlapping. Even thoughone or more types of taxing jurisdictionmay be subject to a limit, the total taxrate may in fact rise as jurisdiction swhich are not limited react to pressure sfor increasing expenditures . New unit sof government (special districts) maybe created with their own power to tax .

Debt service needs — interest andscheduled repayments — may be ex-empt from other limits . The results oftax rate ceilings in checking the growthof expenditures and in controlling ac-tual burdens are not clear.

21

Administration

Difficult problems of property taxa-tion, and important effects, grow out ofadministration, chiefly assessment . Suchhas been the case for as long as this ta xhas been a major revenue source. Dis-cussion is essential for an understand-ing of issues of practical importanc eand of opportunities for improvement .

Assessments Depend uponJudgments

The base of. the property tax — th eamount to which the tax rate is applied— is an estimate of the worth of taxabl eproperties. The estimates are called"assessments ." They are judgments of

value. They have elements of arbitrari-ness and usually fall within a range ofdiscretion which can be large .

The amount of tax due each yearfrom a property does not necessarilyresult from a market transaction as d oincome and sales taxes —nor from awage payment or a purchase. The prop-erty tax applies each year even whenthere has been no market transactio naffecting the taxed property — no sal ewhich gives an assured indication of anagreement between a willing buyer an da willing seller. The millions of familieswho live in houses they own do notmake a cash payment (or receive moneyincome) to show the market's valuationof a year's usage. For many busines sproperties — buildings and equipmen t— sales are infrequent; and the incom eof the company results from the work-ing together of several factors of pro-

duction so that the contribution of th eproperty alone cannot be measuredprecisely.

For administration of property ta xon the majority of parcels of real estate ,machines, and so on, the facts neede dfor a correct determination of currentworth are not available directly . Be-fore sketching what can be done inestimating values (assessments) we shal lexamine the crucial issue of personne lfor administration .

Assessing Sta#

Actual assessments are made inaround 14,000 separate jurisdictions .Most are much too small . Staffing con-ditions differ tremendously .

An essential for good valuation fo rtax purposes is a staff of well-traine dassessors . They should be professionallyqualified, working on a full-time, not apart-time, basis . Selection and promo-tion should be on the basis of merit.Nevertheless, the notion that assessor sshould be elected still prevails in manyplaces, with approximately half thestates still providing for election. Criticssay that this view reflects a misunder-standing of the nature of the job to bedone .

This work is not a type for whic hvoter choice of personnel is appropri-ate. The work of assessment should no tinvolve setting governmental policy, th erole of elected officials . The proper jobis to carry out, that is to execute, policy

22

(1) according to rules set by lawmaker s(who will be elected) and (2) on thebasis of facts. Competence based onformal study and experience undersupervision must be sought. If electionis to remain as a basis of selection, allc~kndidates can be required to meet a tleast certain standards . Perhaps passinga test to prove ability could be require dof everyone standing for election . Thenadditional opportunities for :tudy, in-centives to do so, and rewards for suc-cess will help to improve the quality o fperformance. The International Asso-ciation of Assessing Officers develop straining materials and conducts course sof various types across the country .

Though familiarity with local condi-tions is essential for good valuation ofreal estate, a non-elected (permanent) ,professionally trained assessor can haveas much knowledge of local facts assomeone elected. As a practical matter ,full-time assessors can have more tim eto search out, and to analyze, special-ized knowledge of local conditions an dto cumulate experience. The need fora variety of different kinds of special-ized skills — for office buildings, fac-tories of different types, shopping cen-ters, recreational facilities, utility lines ,multiple dwellings, and so on — addsto the desirability of staffs larger thanpossible in most offices with the tradi-tional local selection .

Salaries and working conditions mus tmeet competition . Private firms dealingin the sale, ownership, and managementof real estate are often on the lookoutfor qualified appraisers . So are financialinstitutions making loans . Competentassessors will be attracted away from

government to private work at highe r

pay.

We now sketch the job to be done .

Listing Real Estate and OtherPrcperties Subject to Taxation

Listing property on tax roll is a firs tessential .' Complete listing of real es-tate is a big undertaking and require scontinuing effort.

The land surface, once it has beenaccounted for, would seem to be essen-tially fixed. In fact, however, changeswhich bear upon taxation do take place .Neighboring plots are consolidated an dothers are divided. Street wideningsand other alterations need to be re-corded. Mapping and the recording o fsurface area call for care ; doing themwell requires various skills . z

Buildings are put up, changed inways that affect their value, and takendown. Machinery is purchased, used,and discarded. Business inventory risesand falls .

Good administration must keep trackof these elements of the tax base . Thetask can be done well . But success re -quires more inputs of time, skill, andequipment than the typical unit of gov-ernment will yet pay for. Reporting ofbuilding permits and inspections shoul dcover a great deal of change from yearto year. Aeronautical photography canbe useful . Large assessing jurisdiction scan effectively utilize equipment andstaff which small units cannot afford .

The data must be recorded. One cardfor each piece of p-. iperty can includethe necessary factual information on lo -

1. Exempt real estate needs to be listed to assure a complete inventory . Such comprehensiveness will help toprevent overlooking some land and building which, wholly or in part, may be taxable currently o rbecome so as a result of change .

2. Cadastres in some countries are registers of property and ownership . Maps may rest on detailed surveys ,They may include a variety of information on topography, soils, and other features .

23

cation, size, materials, and other physi-cal characteristics which affect value . ,One or more photos will be desirable .

Valuation

Good valuation of the thousands ofproperties on a community's tax rolls re-quires accurate, up-to-date facts . Dataon sales, leases, and other market trans -actions are essential ; they can be ob-tained in large quantity —if the effortis made. Too few localities, however ,have done what is required to get thequalified manpower and other facilitie sneeded to do the job well .

As noted earlier, one obstacle in sev-eral states is that assessment district sare still much too small to staff with thevaried skills essential for good valua-tion of properties now within thei rboundaries . Minnesota in 1972 had over2,000; six other states, including suchlarge ones as Illinois, New York, an dWisconsin, had over 1,000 districtseach. Hawaii, on the other hand, as-sesses on a state basis . Even the county ,now the assessing unit in almost halfof the country, will often be too smal lto have enough staff for various spe-cializations.

Each parcel of real property — lan dand buildings — is, or is supposed to be ,valued (assessed) once every few years .Techniques for valuation on a massbasis are required, as contrasted wit hthe more thorough appraisals of bank sand others for financing loans or privat etransactions on a few properties . Nomi-nally, the law may call for assessmen teach year. In fact, no such frequency ofserious review is practically possible . Inthe absence of broad changes such as

inflation (or deflation), it might seem th enumber of major changes from one yearto another would not be too great tohandle well on a four- or three-yearrotation. But at best the task is large.

Business machinery, including lease dcomputers and equipment, trucks, farmmachinery, and aircraft will also pre -sent problems of valuation on a sched-ule frequent enough to keep figuresrealistic . Short-cut methods to adjus tfor depreciation are possible . Valuesused for income tax purposes are no tnecessarily accepted for property taxa-tion. Business inventory, including workin progress or the stock on a retailer' sshelves, may be valued annually or assome average. Household equipmen twhen included at all is rarely assessedat amounts approximating probableworth. Art objects and minerals underthe ground present special problems .

The needs for methods, procedures,data, and staff competence for valuingvarious kinds of properties — officebuildings, factories, shopping centers ,heavy machinery, forests, residences ofmany types (including mobile homes),banks, warehouses, motels, nursin ghomes, and so on — grow as the econ-omy develops .

The staff must have access to theevidence about factors which affectvalue — the physical characteristics ofthe property, terms of rental or sale ,neighborhood developments, zonin gand other governmental regulations af-fecting value, and trends in the region ,and so forth . Assessors need time togather information and to evaluate i tjudiciously. Some facts are a matter ofpublic record . But getting and analyz-ing much of the evidence will require

3 . Laws in over half of the states help by requiring the use of stamps on the recording of real estat etransfers to include the price of sale . At one tithe federal tax stamps to the value of one-tenth o fone percent of the price had to be attached to the deed . When that tax was repealed, some state senacted comparable laws, In this way, they get information of great value for property tax administration .But in the other states this help to assessors is absent .

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persistence and effort somewhat lik ethat of a detective. Owners may bereluctant to reveal data which wouldsupport an increase in assessment .

Manuals are indispensable for goodresults — to guide in making particularassessments and to help assure uni-formity. Preparing manuals and keep-ing them up-to-date is too big a job fo rlocalities (except perhaps the bi 'ges tcities). Generally a state agency canproduce the best results most eco-nomically .

A few governments use computerssuccessfully to handle masses of figuresquickly. Routine aspects of relating newdata to groups of properties can behandled electronically. Various source sprovide information on a large variet yof factors which affect the market pricesof a broad group of properties, such ashousing — number of bedrooms, squar efootage, number of bathrooms, mate-rials of construction, garage space, an dso on. When dozens of such factors ar erelated systematically to past records ofmarket price, the computer can receivenew data and turn out new assessment sfor hundreds or thousands of houses o fthe various types . Such computerizatio ncan relieve assessors of much routin ework and free their time for those as-pects which require non-routine skill sand human judgment . Getting such asystem established requires much effort ,but a large amount of preparation ofbasic methods and computer program sis now available . In addition, succes swill depend upon the accuracy an dadequacy of inputs of data .

The law usually appears to requir ethat tax valuation be the amount fo rwhich the property would sell unde rnormal market conditions on a specifie ddate, neither buyer nor seller being

under any special pressure, Laws havelong called for valuation at full curren tprices ("full cash value," "true marketvalue in money," "fair market value, "or "true value in money") . But the gen-eral practice has been, and in most butnot all states still is, to assess at muchbelow prevailing market levels. Suchundervaluation favors poor assessment .Errors are not so evident when amount sare relatively small . For example, anerror of $1,000 may not be so easilyspotted as would one of $4,000 ; and yetif assessments are 25 percent rathe rthan 100 percent of current marketprice, the $1,000 really means the large ramount. A property assessed at $9,000when the market price is around $30,000may be overassessed relative to others ,but the owner may have great difficultylearning just how he is treated com-pared with others in the locality. Hisassessment is so far below what the lawseems to call for that getting equitableadjustment can be much more difficul tthan when the standard actually set i sthat of the market.

Several states now make it legal t oassess at half, or some other fraction, o fmarket price . Such authorization mayhelp in getting standardization andmore equality. Yet experts are in wide -spread agreement that full value as th estandard offers greater likelihood ofachieving results of generally goo dquality . `

Protection from political pressure togrant favoritism is clearly desirable —but not always a reality. The amountsof tax resting on human judgments canbe large. Temptations to keep the as-sessor subject to political pressure areunderstandable. Homeowners, farmers ,businesses, and others may home tha tthe use of voting power can keep their

4 . Uni/ormity of valuation will be the chief objective, in some cases, however, the revenue obtainable an dborrowing power may in fact depend upon actual, as distinguished from "equalized," ;assessments .

25

assessments relatively low. This condi-tion does much to explain the persist-ence of small assessment districts andchoice by election. Opportunities forcorruption have been, and in someareas remain, larger than inherently

There is no way to know how muchabuse remains as a result of the asses-sor's need to make some use of discre-tion. Informed leaders report, however ,that the combination of professionaliza-tion, public scrutiny, and improvedmethods of handling masses of datahave brought substantial improvement sin many places .

Real estate, the basis of most tax ,usually includes land and man-madecapital . The greatest difficulties ordi-narily involve . man-made capital . As-sessors utilize three general approaches.

Sales prices are the preferred guidewhen they are available. What are theterms of actual transactions at arm' slength? For single-family houses, mar-ket transactions are frequent enough togive satisfactory indications of value forsimilar properties . Features of houseswhich affect worth-differences in size ,materials, age, location, type of roof ,and so on — can be studied and meas-ured. The information can help in as-sessing houses that have not been sol drecently. Sales data can often be usedfor assessing some commercial andother types of business properties, in-cluding many farms. To a meaningfu lextent such properties are often moreor less standardized and are sold ofte nenough to yield data for good results .

Income Capitalization.

For apartment houses, office build-ings, and many properties used forstores and other commercial purpose s(which are not frequently sold andwhich differ from each other far morethan do houses) values can be judgedfrom the income they produce . For ex-ample, rentals can be capitalized on abasis which buyers and sellers accept .If the income is $50,000 a year and o nincome computed in this was a 10 per-cent return is normal, then the capitalvalue will be $500,000 . Much care ingetting the figures, and much goo djudgment in applying them, are re-quired. Persons familiar with terms ofleases and what is going on in th emarket can help in setting guidelines .The portion of the total attributable tothe land can be deducted to give theamount for the improvements . 5 Ofcourse, this method has its own limi-tations. For example, future income isnot always easy to judge. Moreover,speculative elements may not be re-flected adequately in this method ; thechoice of interest rate to use in capi-talization may not accurately allow forthe uncertainties and the forces ofspeculation, positive or negative .

Reproduction (or Re placement)Cost Minus Depreciation. -

Many properties, however, are any-thing but standardized. They are buil tto somewhat specialized requirement s— factories, theaters, apartment build-ings, office and shopping complexes andother stores, and so on .

For the land element, the problem sneed not, as a rule, be markedly diffi-cult. Values of the land on neighborin gplots generally relate to each other moreor less closely and systematically ; sales

An improvement may have negative value ; that is, the land alone if unencumbered would be worthmore than the capitalized value of income being obtained.

here and there can serve for a con-siderable area as the values providelinkage for the area beyond . Publica-tion of maps showing all land assess-ments can provide a valuable check onuniformity, equality, and consistency .

The man-made capital elements pre-sents the greatest problems. For thesemore specialized, perhaps "one-of-a-kind" structures, and for some large,nonstandardized, and often highly tech-nical equipment, reproduction (replace-ment) cost less depreciation is usuall ythe best method. What did it cost (o rwould it cost) to build this electric ortelephone installation, factory or recrea-tion center, paper mill or printing plant?How much has it lost in worth becauseof depreciation and obsolescence?

Estimates based on knowledge of per-sons familiar with conditions may b ecostly to make. Often the results are notfully satisfactory. judgments play alarger role than might seem desirable .Inherently, the assessment of special-ized structures and installations pre-sents substantial difficulties . Construc-tion costs change. Companies buildingtoday would not as a rule try to repro-duce structures as designed in the past .Depreciation is almost always subjec tto debate . The figures used for incometax and business accounting purpose sare not necessarily the most usefu lguides for property taxation. For ex-ample, businesses, in company ac-counts, fr.,,quently use the purchas eprice of land year after year regardlessof changes in market values.

complished more readily than can val-ues for man-made capital ." The latte rconsists c_` :navy more types and in arange of conditions from modern an dsuitable to decrepit and inappropriatefor the location. Parcels of land bea rrelatively close relations to othersnearby. More or less standard rule shelp to estimate the effects of size,shape, and corner location .

Special methods are often used fo rpublic utility properties. Zoning andeasements, minerals unseen below an dair rights above, and other element spresent problems requiring special evi-dence and methods .

Judging Quality of Assessment :Sale-to-Assessment Ratios

Most cases of assessment inequityhave probably been "moderate" rathe rthan "large" in ai.ount. But some in -equality of assessment has been so grea tthat, in relation to property holdings ,owners and users have paid much les stax than have others . Study after studyhas revealed assessments that aregrossly unfair . Shockingly unequal as-sessments have continued. Fortunately,methods for improvement have beentried, tested and improved upon . Prog-ress has been made, substantially insome places, moderately in others — bu tscarcely at all in some localities .

As noted earlier, the public does no tordinarily have a solid basis for judgingthe quality of assessments, especiallythe extent of inequality. One method of

No summary as brief as this one can evaluating assessments is the prepara -possibly explain the many factors which tion and publication of "sale-to-assess -must be taken into account in assessing meat" ratios. Generally objective con -the vast variety of properties which elusions can be reached without undul ymake up the tax base . In general, satis- complicated study . How do prices offactory valuation of land can be ac- sales of taxed property in the fre e6, One major city the District of Columbia, utilizes it private board of persons engaged in real estat e

activities to review proposed land assessments and suggest improvements .

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Table 5Percentage of Assessed Value toSales Price of Sold Properties ,

Single-Family Nonfarm Houses ,Selected States, 197 1

state

Ratio (percent)

United States: Mean

34 .0Median

32 .6

Oregon 87. 1Kentucky 83.8New Jersey 58.3Massachusetts 49.3District of Columbia 47.5Wisconsin 46.7Michigan 41 .5Illinois 37.8Ohio 36.9Washington 36. 1Virginia 34.8Tennessee 32.6Pennsylvania 26 . 6New York 25 . 8Indiana 23 . 5Colorado 20.7California 20 . 0Oklahoma 18.2Texas 18.0North Dakota 15. 1Louisiana 13 . 1Minnesota 8.5South Carolina 4.0

Source . 1972 Census of Governments, Volume 2 ,Pa rt 2 .

market compare with assessments? I fHouse A was last assessed for $15,000and was recently sold for $30,000, the nthe ratio of assessment to sale was 1 to2 or 50 percent. If most other caseswere about the same — 47 and 54 an d46 and so on — then the level seems t ohave been around 50 percent . Increas-ing use of such ratios gives assessor sand their supervisors — and the publi cand often a state agency which hassome oversight responsibility — a usefulcheck.

The 1972 Census of Government scompared actual selling prices of spe-

cific properties, chiefly single-familyhouses, in 1971, with the assessments .Table 5 presents some of the findings .

Assessments were usually much be -low the market level. Wide inequalityin under-assessment was also extensive .Yet, compared with similar surveys for1956) 1961, and 1966, substantial prog-ress had been made through much ofthe country; and in some areas, theresults are better than may once havebeen deemed achievable .

Facts about the accuracy of assess-ments of more complex business prop-erties are not generally obtainable .Sales of factories, warehouses, officebuildings, etc., are rare. To get gen-erally equal assessments of nonstan-dardized properties of about the samegeneral type (apartment buildings ,gasoline stations, or department stores)requires higher quality work than mostcommunities provide . The levels of as-sessment sometimes vary from one typeof property to another, perhaps inten-tionally. For example, discriminatio nagainst business properties may resul tfrom the desire to get the votes ofhomeowners . In other cases, however,assessments may favor companies to im -prove the community 's competitive po-sition, economic base, and employment.

Is it possible to test the general qual-ity of assessments of types of propertiesnot often sold? The data obtainablefrom more or less public sources can b eassembled and analyzed L. the govern-ment — or some private orgax ization —provides a staff with the skills, time, andincentive needed . Properties are boughtand sold in the free market . Rentalcontracts are made . New loans are ar-ranged. Figures of appraisals for privat epurposes sometimes become available .Moreover, a state or other supervisor yagency can arrange r--or detailed ap -

28

praisals of a sampling of taxed proper -ties. If valuations made in this way con-form generally with assessments, the nthe latter will inspire confidence. If not,there are indications of where changesare needed and probable magnitudes .

Quality of Assessment Results

The 1972 census found that in 9 state sresidential property (nonfarm) was as-sessed at less than 15 percent of sale sprice. In 9 states assessments averaged50 percent or more. Acreage and farmswere often assessed at lower percent-ages of sales prices — under 15 percentin 18 states. Vacant lots were also as-sessed generally at lower percentages ofsales prices than houses. (See Table 6 .)

Inequalities within the same com-munity (intra-area dispersion) and fromone community to another (inter-are adispersion) are low in some places andmany times as great in others . Table 7shows 1971 figures for selected states .Low figures indicate uniformity — goo dquality — of assessment in this impor-tant respect .

Opportunity for Owners To GetAssessments "Corrected"

An essential for good administrationis an opportunity for the taxpayer t ocompare the valuation placed on hisproperty with those on others in thearea, and to press for correction if hisseems to be out of line (too high). "Onpaper" it seems that every owner doe snow have access to facilities for appeal-ing a tentative assessment or challeng-ing one after it has been recorded o nthe rolls . Cheap, simple, informal pro-cedures do seem to be provided by law .The realities, however, vary. Stages ofappeal exist. Usually, there will be anopportunity to get a review by theassessor or one or more boards beforegoing to court.

The actual procedures differ fromstate to state . Presenting evidence i susually required. Sometimes an ownerwho wishes to appeal a valuation canuse the sales-to-assessment figures tabu-lated in the assessing office or by a stat eagency. Membership on the administra -

Table 6Distribution of States According to Aggregate Assessment-Sales

Price Ratios for Major Use Categories, 197 1Number of States

Statewide aggregate Single Multi- Vacant Commercia landassessment-sales

price ratiosfamil y

residentialfamily

residential Acreageplatted

lots industria l

Total,

all

ratios 51 51 50 a 51 5 1Ratios of :

Less than 15 percent 9 9 18 14 915 to

19.9 percent 5 5 7 6 620 to 24.9 percent 6 4 4 5 725 to 29.9 percent 5 4 4 8 530 to 34.9 percent 3 6 6 3 135 to 39.9 percent 7 2 6 5 340 to 49.9 percent 7 11 2 6 1 250 percent or more 9 117 3 4 8

a . Excludes District of Columbia .Source : 1972 Census of Governments, Volume 2, fart 2 .

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Table 7Assessment Uniformity, Single-Family Nonfarm Houses ,

Selected States, 197 1Composite coefficlont of Intra-area dispersion Coefficient of Inter-area dispersio n

state Percent State Percent

United States-median 22.5 United States-median 14

Kentucky 12.5 Utah 4Michigan 14.6 Iowa 5New Hampshire 15.0 Maryland 5California 15.7 Oregon 5Oregon 16.5 California 8New Jersey 16.9 Ohio 8Hawaii 17.2 Kentucky 9Florida 18.1 Colorado 1 0Massachusetts 18.2 Illinois 10Ohio 19.5 Michigan 1 1Vermont 21 .2 Kansas 13Tennessee 21.4 Delaware 14Minnesota 22.2 Minnesota 14North Carolina 22.5 Connecticut 16Illinois 23.0 Missouri 17Indiana 23.1 New Jersey 21Georgia 23.6 Washington 21Washington 23.9 North Carolina 22Arizona 24.7 Maine 24Louisiana 25 .1 Wisconsin 24Texas 25.7 South Carolina 25West Virginia 25.7 Alabama 26Missouri 26.5 Pennsylvania 26New York 26.8 New York 32South Carolina 27.9 Mississippi 33Alabama 28.1 Massachusetts 40Pennsylvania 30.0 Louisiana 42

Source : 1972 Census of Governments, Volume 2, Part 2 .

tive boards of review is not as a rulebased on proof of special capacity andcompetence for judging property val-ues. Often appellate board personne lare part-time ; many are elected; someserve ex-officio. Boards frequently re-view decisions for which their ownstaffs were responsible . Rules of proce-dure may be informal . Reasons for ac-tions to revise the original figure, ordecisions to let it stand, are not as arule spelled out . Opportunities for fa-voritism and stubborn refusal to gran trelief can be substantial; results can gounchecked .

Cases going to court set precedent sfor values in an area. Assessors maythC'n feel bound to utilize about thesame figures even when the judges maynot, really, have designated the mos taccurate amounts .

Equalization of Assessments

Local assessment of property leads t odifferences in the general levels of val-uation from one place to another . Thedifferences from one district to another-- 35 percent in one district, 30 percen tnext door, 25 percent elsewhere -- even

30

if there is general equality within lo-calities, can be large enough to hav ereal significance if more than one levelof government uses assessment made byothers. For example, assume that townofficers make the assessments whileschool boards which have differentboundaries, or the county, also rely o nthem. Assume Town A values at around40 percent of market and Town B a t33 percent; then a single tax rate by theschool district part of which lies in eachtown will impose unequal burdens asbetween residents in A and those in B .

Some adjustment is needed. Equali-zation of assessments is designed to doso. And it is used for another purpos ewhen, for example, a state uses assess-ments in allocating grants to localities .

Suppose that the state in makinggrants for schools desires to providefunds on some basis which will recog-nize differences in local conditions —perhaps to give relatively more topoorer than to more prosperous dis-tricts. What index of local economi cconditions is available? The value ofproperty would seem to be relevant .But if assessments are not on the sam ebasis from one town to another, theycan hardly give accurate indications ofdifferences . And if they are used with-out correction, localities will have apositive incentive to under-assess togive an appearance of being less wel loff than is actually the case . A level o f20 percent could lead to the appear-ance of having less economic bility ,and require relatively more grants fro mthe state than a level of 30 percent .

"Equalization" is the process whichstates have devised to deal with suchdisparities, A state staff compares loca lassessments on some systematic basis .

Sales-assessment ratios are widely used .Some independent appraisals of sam-ples of properties in various assessin gdistricts are occasionally made . Per-centages can be published for use i nadjusting actual assessments to give"equalized" figures .

Use ol Private Appraisal Firma

Communities sometimes hire privat ecompanies to reassess all properties .Firms making a business of mass ap-praisal for tax assessment can emplo ya staff much larger than that used per-manently ; they can concentrate person-nel to cover the entire area within arelatively short period of time . Theycan employ uniform standards over th earea; as specialists they may use meth-ods which are better than those em-ployed by regular assessors. The localitywill also usually get new listings anddescriptions of property and perhapsother data' and records .

The background of need for suchmass appraisal varies but generallygrows out of the rate of change inrecent decades . Many localities haveundergone growth and change of rea lestate values which have been fasterthan assessors have been able to allo wfor fully .

As assessments get out of date, therolls accumulate a large proportion o finequities.' Unquestionably, then, acomprehensive reas°essment may b eneeded. The permanent local staff istoo small to do a complete job. It maynot have some of the skills needed . Itsmaps and other records may havelagged. Assessors may be reluctant t oadmit that existing assessments are aspoor as is the case, Moreover, loca lofficials may be subject to local pres-

7. All properties may be valued at, say, 30 percent of market price but as of different dines, If olde rproperties are on the tax roll at 30 percent of a valuation (tit the last routine assessment) of the earl y1960's, newer properties will be at 30 percent of values of lute 1960's . Much uieyuality results,

31

sures of various types, and at a grea tdisadvantage in making large changes .

A "new start" requires outside help .The locality will ask mass appraisa lfirms for bids on a contract to get rec-ords and assessments up to date on auniform basis . For once, everything wil lbe valued by the same yardstick . Thelocality with its regular staff can hop eto keep abreast of the changes thatcome — though in fact it may fall be -hind because of lack of determinatio nand staff . The companies claim spe-cialized capacities of various kinds ;many of them have accumulated a vas tamount of experience . For knowledgeof local conditions they can utilize per -sons from the area, as employees andas consultants . The figures proposedwill presumably be open to publicscrutiny and open to appeal andchange .

Utilizing mass appraisal firms effec-tively presents problems. Competitivebidding may be required by law an dshould help to keep costs down . Butdifficulties arise because the quality o fresults can vary, and the low bid maybe possible because the company doesnot intend to devote the effort require dfor a really good job. The communitycannot in advance determine the dif-ference between top-notch as comparedwith mediocre results . Local official swill have little experience in specifyingthe requirements, selecting a firm, an dchecking the processes and results . Towhom can the locality turn for help ?The International Association of Assess -ing Officers has material to assist i nguidance. So do the tax authorities ofsome °ates .

Setting the Tax Rate

Each unit of government -- county ,town, school district — will determine

its tax rate for the year. A town, forexample, will compute the dolla ramount of property (the assessment )which will be subject to its tax—per-haps $100 million. It then estimates th eamount of revenue it must have fro mthis source —perhaps $900,000 . A rateof 0.9 percent (9 mills per dollar o fassessment) will yield the necessar yamount. Then if from the same area:he school district needs $4,000,000 (4 .0percent) and the county $700,000 (0 .7percent), the total rate for these thre egovernments—5.6 percent or 56 mill s—will be applied to the assesse dvaluation .

Because assessments are usually muc hbelow market prices, the "effective" taxrate, i .e., the rate in relation to actualvalues, is lower than the quoted (mill -age) rate. If assessments are half of thecurrent market prices, then a 5 .6 per-cent rate is in effect — 2 .8 percent ofwhat the property is worth.

Sometimes the tax rate and thebudget of which it is a part may needexplicit voter approval. More gener-ally, the local officials have authorityto set the figure ; they of course aresubject to election . Voters have moreinfluence on the local tax rate than i sgeneral1v true for Federal or state taxes .

Property taxation permits gradualis min rate and burden changes . To meetrevenue needs, city councils, schoolboards, and other bodies can mak esmall changes in the tax rate . Rates areoften carried to several decimal point s— to less than one-tenth of the one per -cent — 5 .7602. Such rate adjustmentscontrast with the more substantial ac-tions which are ordinarily required tolegislate changes in rates of existin gincome or sales taxes ,

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IV.Who Bears the Burden of

Property Taxation?

How are American property tax bur-dens distributed among various group s—by income class or age or size offamily? How much is the actual tax a sa percentage of income? Are difference sin burden related reasonably to accept -able criteria of fairness? Is it really true ,as often asserted in recent years, thatthe property tax is one of the mos tregressive and, if so, is it therefore -mustsubject to condemnation ?

Complexity of Tax Shifting :Introductory Commjnts

The person who really bears the taxon a factory or other property will ofte nbe different from the one who writesthe check. Sometimes the picture ofproperty tax shifting and the final in-cidence will be clear ; economic analysismay support the impressions of th e"man in the street ." Much tax, however ,comes from properties that presentquestions of tax shifting which aremore complex .'

Occasionally, the process of shiftin gmay seem to work rather clearly — asfrom building owner to tenant when alease agreement specifically providesfor the passing on of a tax increase .Often, however, the process is bothobscure and slow .

The period since World War II hasbeen one of extensive acceptance -if

rising property taxes . The communitywhose members wish to pay more forschools, or for some other activity, cando so without being held back by th erest of the county, the state, or eventhe country as a whole . The same poweralso means that taxpayers can expres sdissatisfaction and ,eject budgets whic hwill require tax increases . Except onsome business property people in the 'locality bear the tax more evidently fo rwhat they get from expenditures tha nin the case of state and Federal taxes .

Property tax rates when expressed a sa percentage may seem small . But theyapply to capital values each year. Oftenthey are "high." Therefore, comparisonof property tax rates with income orsales tax rates can be deceiving . A3 percent property tax equals 33 per-cent of the pre-tax income from a prop-erty which yields 6 percent to th eowner. The property tax is half of theyield after tax . An increase of 0 .5 per-centage point would reduce the amountremaining after tax in such a case b yone-twelfth, i .e., equal to an income ta xrise of about S percent . Of course, as weshall see, some of the increase in ta xmay be shifted to consumer2 or others .

State sales tax rates — 4 or 5 percen tor more — are often higher than effec-tive property tax rates . But the latterapply anew each year on the sam e

1, A recent summary analyzes the current thinking and discusses problems of measurement . Dick Netzer ,"The Incidence of the Property Tax Revisited," National Tax Journal, Dec, 1973, pp, 515-35,

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property. Many items subject to salestax will be useful many years ; a 4 per -cent sales tax at purchase will averag eto less than one percent for each yea rof usage —much less than the annua lproperty tax on a house or utility prop-erty. Moreover, comparison of propertytaxes with retail sales taxes requires as-sumptions about shifting — who actuall ybears the burden?

Land: Capitalixation of Tax

Suppose that the tax on land has beenraised. Row might owners try to shif tthe increase? They cannot alter theamount of surface area . Ordinarily,then, there is no way to get a higherrent; the tax change itself does not rais edemand for the land unless the spend-ing in the area of the larger tax reve-nues makes it more desirable. The sup-ply of land is fixed. Generally, theowner must bear the burden of a ta xincrease.

Earlier we noted two elements ofproperty taxation — land and man-madecapital. As regards tax shifting, thesetwo present significantly different as-pects.

Land brings a flow of benefits . Somego to the owner, some to the govern-ment. For example, total ber. efits maybe worth $1,400 a year. The owner canget them for himself if he uses the land ,a payment from someone who rents.But law will not permit him to keep th etotal . The government insists upon, say ,$400. The owner may retain the $1,000 ;or he may pay some as interest on loan sto finance the purchase .

What determines the total yield froma piece of land? Demand and supply ,but with special aspects .

The value of land is not, ordinarily ,and for the most part, the result of cre-ative activities of the present owner, orthose in the past.' Broad economicforces determine the worth of land in it spure sense (as a product of nature) . As alocality grows, land values freqeuntlyrise. More people and more businessescompete for limited space . And, ofcourse, local government spending onstreets, schools, and other public fa-cilities has much to do with the worthof land.

A buyer will pay a price based on hi sestimate of the worth to him of the flo wof future income — net, after propertytax. Therefore, the tax on land value saffects the price of the parcels . Thegreater the tax, the lower the price o fland. Let us illustrate the process called

The supply of land is essentially fixed tax capitalization .by nature. The amount in a communityis not affected by the property tax .

Land, we assume, will be owned in

Whether renting or selling, landowners, perpetuity . The price agreeable to a

one can assume, will try to get the high- willing buyer and a willing seller de -oneprices possible . Demand will per- ponds upon a simple relation —

mit them to get some price — as in the

Expected annual net incomecase of demand for eggs or shoes . But

yield obtainable from other asset sthere is a difference. The price of eggs

(of equal quality )will affect the number supplied. But thequantity of land is not produced in If the income before taxes is $1,300 an dresponse to differences in price .

the tax is $300, then how much would2, Exceptions do occur as "land fills" turn marsh and coastal areas into usable land or as hills are leveled ,3, Where an owner hits not been getting as much rent as possible, it tax increase may nudge him to try t o

exploit the existing rent potential more fully .4 . Increasingly, governments require developers to build or finance sewer, street, school, and other facilitie s

normally provided by governments .

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a buyer be willing to pay? The answerdepends upon yields he can get fro mother assets of equal quality . If 5 per -cent, then he will pay $20,000.

Gross income $1,300-tax $300 =net $1,000

Yields of comparable properties, 5%_ 1,000 _

$20,000.05 —

The $20,000 is the capital sum whichwill bring, net, the income expecte dfrom this property . An owner hopingfor a higher price, will have no placeto turn; nor can he for a time slowdown production, as can a manufac-turer, to get a new balance of supplyand demand that will permit a higherprice .

Now let us assume that tax rises by$100 a year but no other changes . 1i

Gross $1,300 = tax $400 = net $900Price

= $18,000Capital value decline =$ 2,000

Any person buying afterwards, how-ever, is no worse off because the annua ltax is $400 instead of $300. He paid alower price . But he would benefit froma tax cut.

Tax on Buildings and Machinery

Shifting of a change in tax on build-ings, equipment, or business inventoryinvolves a process quite different fromthat for land. With the passage of time ,the final resting place of the tax —it sincidence — can differ from the initialimpact .

One case seems clear . The typicalhomeowner bears the tax on his house

except, of course, for the tax that ex-isted on land at the time when he pur-chased it as owner and occupant . Thereis nothing he can do to force someon eelse to pay. He must shoulder an in-crease in burden while he is the onlyuser.

If a residential or business occupan tis a renter, the rental contract may re -quire him to pay an increase in tax(or promise him a pass-through if th otax is reduced) . Otherwise, the ownermust shoulder the increase. But as hisnet income goes down, he has reasonto try to get occupants to bear it . Butwill they be both willing and able todo so? How can owners force users topay more rent just because of an in -crease in tax? Let us sketch the eco-nomic principles which apply to th eshifting of ' tax on man-made capital . ,'

The tax on business buildings an dmachinery is a cost . So is the tax onresidential structures for rental. Taxeson factories and machinery, electricand telephone facilities, store and officebuildings, apartments, trucks and com-puters, inventories and raw materials ,and so on, are part of the expense o fsupplying goods and services . Com-panies can try to recover this expense(1) by charging higher prices to cus-tomers or (2) getting the suppliers o fgoods, materials, services, or capita litems — or employees or landowners —to accept lower payments . But what ,really, are the possibilities of pushingthe tax on to others? Can businesse sreally induce customers or supplier sto bear the tax, assuming that they ar enot getting better government services ?If yes, then how? Must a tax increas eremain on the owners of the company ,

5 . If the $100 is spent in ways that add to the attractions of the area, then adjustment must be made, I fgross income becomes $1,350, e.g ., better schools, then there would be only half its much change i nprice of the property .

8 . Income tax considerations can sometimes overshadow property tax, But the former cannot be taken int oaccount here,

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not only at once but indefinitely, b yreducing net earnings?

To shift the tax forward to the con-sumer, or backward to suppliers of fac-tors of production, a business firm mus tsomehow utilize the forces of demandand supply in the market. Part of thisprocess will often be slow. ?

Nothing about an increase in prop-erty tax is likely to boost demand, Th edemand for the company's product i snot likely to rise nor is the spending ofgreater revenue by the local govern-ment likely to improve appreciably themarket for the products of businesse spaying higher taxes or generally to re-duce operating costs . $

So the company's adjustment mus tmore often be in the supply. For thetime being, however, the amount o fproductive capacity in existence is moreor less fixed. Cutting the amount ofoutput supplied to raise price wil lprobably not be practicable to helpcover an increase in property tax; thelatter is a fixed expense rather tha none which rises or falls with change sin output . A higher price means a de-cline in sales which will have unde-sirable aspects . Profit margins will nar-row as tax is absorbed. Competitors ,especially companies in areas wherethe tax has not gone up, will not al lraise their prices .

As the months and years pass, how -ever, businesses can adjust to the tax .They can change their use of man-madecapital of the type subject to tax .

A company will not buy or rent a nexisting building, or pay to build a new

one — or to add machinery — unless i texpects to get a high enough price fromcustomers to cover all costs. These costsinclude the property tax . Assume thatconsumers will not pay higher price sfor this company's products (becauseof competition) and that labor andother costs will not go down . Then somebuilding projects and machinery addi-tions which would have been profitabl ewill not be attractive because of th ehigher property tax . For the same gen-eral reason, new expenditures on con-struction of housing for rental will b eless . "

Some plans for business expansio nand modernization in the area will bescaled down, some put aside perma-nently or delayed. As a result, in high -tax localities (and over the country)the supplies of business output and o fhousing will be somewhat smaller thanotherwise. Such restraints on the growt hof supply will mean that graduallyprices will be higher than otherwise.In an expanding economy where tota ldemand moves upward, this result wil lcome sooner — and especially in indus-tries and areas with rising demand . Thebasic forces of market demand andsupply operate, largely unseen . The tax-shifting process rests to a large exten ton the effects of the flow of new capita linvestment on the supply of productiv efacilities .

Assuming that other things are thesame, the higher the property tax, th eless a business or a family can affor dto pay for a building or productiveequipment. The supply of new con-

7. One muy hear that husinesses can raise prices more or less its they wish, Casual impnessions nuay lead u sto believe that businesses set prices, But the customer plays it part in the eventual results, When ta xcosts g o up, market conditions are not likely to permit companies to boost prices and to benefit, Can th ecompany in fact nutke the higher price stick without leading to it drop in quantity sold that more tha noffsets the benefits of higher price? Ordinarily, coin t etitive forces restrict what it company can do .

8. Better streets, sewers, policing, fire protection or education nuty in some cases save operating expense sand thus offset some of the adverse effects of taxes as regards businesses ,

9, A family buying it house for its own use will pity on the husis of the iunouat by which the expecte dbenefits will exceed tlae probable costs, including annual property taxes ,

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struction will reflect the level of taxe son buildings, 10 The higher the local tax,the smaller the amount of new capita lfunds going into construction and int otaxed production equipment in the area .

One or two or three percentagepoints a year in the net after-tax returnon capital investment can depend ondifferences in property tax — perhaps 6as against 8 percent .

Some Property Tax Will Not BeShiftable and So Remains on theSuppliers of Capital "

Not all of the property tax on man-made capital can be shifted to the con-sumer. Admittedly, our knowledge ofwhat really happens is incomplete . Buteconomic principle indicates that som etax remains upon suppliers of capita lby keeping their net, after-tax returnlower than if property taxes (on man-made capital) were less. The personsaffected may not see what is happeningbecause the market forces do not labe lthemselves .

Why, even in the long run, may notthe suppliers of capital funds fully suc-ceed in raising prices enough to makethe consumer (and the renter) bear th efull burden of the property tax? Th eanswer: Conditions of demand andsupply do not ordinarily permit price sto go up enough to recover all of th etax, As a result, the saver who provide scapital funds will get less net incom eafter property tax than if the tax werelower.

Why may long-run market forcesnot permit shifting of all of the tax to

consumer, ;? Several factors are in-volved. We do not know for certai nhow one among the many operates,But the reasoning relies heavily on anapparent conclusion from the study ofstatistics on personal and business sav-ing.

Over the economy as a whole th eamount of net new saving depends toonly a moderate extent upon difference sin after-tax yield within ranges of dif-ferences resulting from property taxa-tion averaged over the country . 12 Lowerprices for shoes or eggs will reduce th esupply. But within limits, lower reward sfor saving do not apparently cut th eannual supply of net new saving b ymore than a slight percentage . For ex-ample, assume that property taxes goup — perhaps from 2% to 3 percent —on full value, reducing the immediat eafter-tax net return to suppliers of capi-tal by half of one percentage point .This decline in yield may not greatlyreduce the country's total supply flowof new savings. The drop, it seems, willbe too small to permit a rise in pre-ta xyields that will be great enough to com-pensate for more than a modest frac-tion of the tax increase ,

All of family and business savingsthat are made, we assume, will seekinvestment in productive form. Butsince the supply of annual funds seek-ing investment is nearly as large as i ftax had not been increased, saversmust be satisfied with less after-taxyield — initially, in the illustration ap-proximately M a percentage point, Sav-ers and the financial intermediaries thatserve them, however, may try to direc t

10 . The quantity of land in existence, to re wat, clues not depend upon the amount of tux . Differences in thedemand for land will affect the price . When at high property tax on buildings reduces the flow of ne wcapital into it locality, hand values will be somewhat lower its it result ,

11, Deduction of property tax in computing taxable income is not at issue here . For simplicity, we canassume that someone else qualifies for the deduction of p roperty tax ,

12 . The evidence and the analysis present more difficulties than can be discussed here . Lower yields reduceboth (1) the rewards for saving and ( 2) the income from which uew savings can be made,

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new savings to places where the taxhas not gone up.

Over the economy as a whole ther eare not many opportunities for rea lproductive investment (forms of man-made capital) which are free fromproperty tax. Most productive facilities(including housing) are taxed . Exceptfor governmental debt, and in som ecases inventory and machinery, thereare almost no places in this country forthe flow of new savings to go wherethere is no property tax (direct orindirect) on the facilities which ar eadded to the economy 's productivewealth. Savers do not, therefore, haveeffective ability to withhold new in -vestment funds to permit the full shift-ing of tax .

Supply capacities will not be reducedby amounts which are large comparedwith the tax change. Without the effect son tl,e supply of output assumed earlier,tho shifting of all of the tax seems eco-nomically impossible . 1 3

What, today, would be the yields t osuppliers of capital if property tax werematerially different? How much moreproductive facilities would exist if therewere only half as much tax on man -made capital? We have no way ofknowing, in part because other condi-tions of taxation and government spend -ing would be different . But it is hard tobelieve that over the country as a wholeyields would be lower by 112' percentagepoints. This is a level which is almos tthe bottom of true effective rates . Newsavings have almost no place to gowhere property tax is below about lh

percent. After-tax yields, therefore ,must generally be lower than otherwise .

Some localities, however, have taxrates which are much above the gen-eral level . In these areas, shifting wil lfollow the lines sketched earlier . Forexample, the 1972 Census of Govern-ments found that in 1971 effective taxrates in 13 out of 122 cities were 3 per-cent or higher and 2 percent to 3 per-cent in 40 more . Market forces willoperate to pass some of the burden o nman-made capital along to the user .Assume that the effective tax rate onnew buildings and machinery in CityA is 4% percent of full value, while overthe country the rate is generally at least2 percent (and nowhere below 1M per-cent). Capital for new housing and forbusiness property will not come to CityA except when investors believe thatthe after-tax return will be as good a sis obtainable in lower tax areas . Thegross, pre-tax return must be at leas t2,12' percentage points above the 2 per -cent rate assumed as a general mini-mum to leave the investor with as muc hafter tax as in some places . Businessesexpanding their productive capacitymust have confidence in their abilityto shift this 21i percentage points of ta xto the consumer (including the buye ror renter of a house) or backward t oowners of land ."

The economic processes of this shift-ing are hidden, not observable . Butmarket forces of supply and demand fo rnew capital do operate . Some funds fornew productive facilities and housin gwill tend to stay away from the hightax areas until conditions there do per -

13, As noted earlier, securities are not generally subject to property tax, but the buildings and machine swhich underlie their worth are taxed, Americans with savings can, of course, seek investment abroad ;in most of the world taxes corresponding to ours on property are much lower, Actual property tax dif-ferentials will tend to add to the forces which lead to the export of capital and discourage capita limport ; even at their largest, however, such changes may be small ,

14, Regulatory commissions may subject the railroad, electric, telephone or other industries to delays i ngetting authorization to try to pass a tax increase to customers . "1i , ulatury lag" can in fact forceshareholders to bear tax burden which the law presumably means to fall on customers ,

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mit shifting a portion of the tax to con-sumers. And demand for land is therebyreduced in high tax areas, land price swill be lower so that some of theburden is in fact shifted backward toland owners .

As regards the typical homeowner ,the doubts about whether property taxon man-made capital falls on personsas consumers or as suppliers of capitalmake no great difference. The samepeople use the housing and providemost or all of the capital .

In contrast, the occupant of rentalhousing does not supply the capital ofthe building he occupies. Therefore,some importance does attach to theeconomic forces which determine howthe tax will be shared between the oc-cupant and the owner. 15 The ownerwill not be able to shift all of the basictax, the N to 2 percent or so assumedabove. 1 6

Estimates of Distribution of Burden

Various estimates of the property ta xburden by income levels are available .At best, they cannot be fully satisfac-tory. In fact it is not necessarily tru ethat income is the best base for com-parison. Benefits received from govern-ment spending, or total consumption,or wealth, might in some respects bea better base than income for relatin gtax. Permanent (or lifetime) incomemight be a better reference than thefigure of any one year .

Of necessity, estimates rest on as-sumptions about shifting which do no ttake account of all the elements just

discussed. Differences from one com-munity to another are rarely measured .Within each income group the relativ eburdens can vary significantly . Datasources are incomplete . Conclusions ,therefore, must be used with caution.Tables 8 an,' 9 present findings basedon two alte. native assumptions. Ob-viously, the assumptions used make agreat difference at the extremes of in -come — under $3,000 and over, say ,$50,000 .

The dollar amounts are "low" at thebottom of the income scale and "high "farther up. The typical family at the$15,000 income level pays much morethan the one with $5,000 or less . Butif income is the base of reference, usin geither of the two sets of assumption sthe tax is relatively heavier unde r$5,000 (1966 incomes) than from $5,000to $20,000.

Assumption A comes closer than Bto the economic analysis describe dabove and increasingly endorsed byeconomists, that at least a considerablepart of the tax falls on the supplier ofcapital. It shows in Table 8 that above$10,000 the tax is progressive. Above$25,000, burdens as a percentage of in -come are much higher on this assump-tion than at the bottom of the incom escale.

Most estimates show that a very largefraction of the total revenue comes fro mtaxpayers in the income range — sa y$5,000 to $20,000 (1966 incomes) inwhich the burden, even if somewhatregressive, is roughly proportional withincome. Table 9, using deciles, give smuch the same general impression a s

15, Where taxes are above average, so will be local government spending. Residents presumably benefitfrom the high government outlays . Demand for places to live in the community, therefore, may be higherthan otherwise . For businesses, however, considerations are different . Will the benefits of the highergovernmental spending lower production costs, or raise product demand, enough to offset the higher ta xon the company ?

16, To consider possibilities of lenders as suppliers of capital bearing some of the burden would requir erepetition and elaboration of points made curlier,

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Table 8

Property Tax as a Percentage ofFamily Income by Income Class :

Estimates Based o nAlternative Assumptions, 196 6

Adjuste dfamily income

(thousands)

Assumption A Assumption B

$

' 0.3 2.5 6.53 .5 2.7 4.85.10 2.0 3.6

10.15 1 .7 3.215.20 2.0 3.220.25 2.6 3. 1

25 .30 3.7 3. 130.50 4.5 3.050.100 6.2 2.8

100.500 8.2 2.4500-1.000 9.6 1.7

1,000 and over 10.1 0.8

All classes • 3.0 3.4

Assumption A. All of the tax falls on owner sof property, i .e., is a burden on property income .

Assumption B . Tax on land falls on landowners .Tax on improvements falls on housing and othe rconsumption.a . Includes negative incomes not shown sepa-

rately.Source: J . A. Pechman and B. J. Okner, Who

Bears the Tax Burden (Washington, D .C .:The Brookings Institution, 1974), p . 59 .

Table 8, using family income, excep tthat the top tenth is not spread over aseries of income sizes (roughly all ove r$20,000) which include relatively fewfamilies each but show marked differ-ences .

Tables 10 and 11 present estimate sof burden on homeowners . 17 Home-owners bear the burden largely in con-nection with Heir housing, plus utilityservices . The payments go for educationand other services provided by loca lgovernments .

Table 10 shows that per $1,000 ofvalue, taxes differ from one region to

another. Taxes are higher per dollar o fvalue on lowest value houses .

On the assumption that all of the taxremains on homeowners, the tax in in-come groups from $10,000 to $15,000 ,which include one-fourth of all home -owners, ranged from 2 .0 percent of in-come in the South to 5 .3 percent in theNortheast . For the next largest incomegroup (16 percent of all homeowners) ,burdens as a percentage of income weresomewhat higher.

Equity of Tax

A regressive element exists under$5,000. And regressivity is generallybelieved to be undesirable . By someconcepts of "equity" which are widelyaccepted, such a distribution of burde nis inequitable. It conflicts with a goalof "vertical equity" in the sense that

Table 9

Property Tax as a Percentage ofFamily Income by Population Decile :

Estimates Based onAlternative Assumptions, I M6

Population docile Assumption A Assumption B

First • 2.1 6.4Second 2.6 5.1Third 2.6 4.6Fourth 2.1 3.8Fifth 1 .8 3 .3Sixth 1 .6 3 .2Seventh 1 .7 3 .2Eighth 1 .8 3 . 2Ninth 2.2 3.2Tenth 5.1 2.9

All deciles " 3.0 3.4

a. Includes only the top half of the decile, unitsIn the sixth to tenth percentiles .

b. Includes negative incomes not shown sepa .rately .Source : Same as Table 8 .

17 . 'tables 10 and 11 apply to 1971 and do not, therefore, take account of much of the new types of relief(circuit breakers) for older persons with low incomes .

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