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Property Tax
© Allen C. Goodman, 2009
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Property Tax as Percentage of State and Local Taxes
--
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
1975 1980 1985 1990 1995 2000 2005
Year
Per
cen
tag
e
Great Lakes
Illinois
Indiana
Michigan
Ohio
Wisconsin
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=517
1977 1982 1987 1992 1997 2002 2004 2005Great Lakes.................................................................................36.9 36.8 33.6 36.0 32.8 33.8 34.8 34.9 Illinois .................................................................................36.7 35.7 34.2 38.6 38.1 38.1 39.6 38.0 Indiana .................................................................................36.8 35.6 32.0 30.7 34.6 35.2 32.5 35.8 Michigan .................................................................................37.5 42.5 38.2 42.7 29.0 32.0 35.8 36.6 Ohio .................................................................................37.7 33.6 28.2 29.7 28.8 29.4 28.7 28.7 Wisconsin .................................................................................34.5 35.0 34.6 34.9 33.4 34.7 36.3 36.4
2006
37.6
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Property Taxes as a Percentage of Total State and Local Taxes, Selected Years 1977-2005
Region and State [1] 2005 2004 2002 1997 1992 1987 1982 1977
United States .................................................................................30.6% 31.5% 30.8% 30.1% 32.2% 29.9% 30.8% 35.5%
New England.................................................................................39.2 40.1 40.0 37.6 39.3 35.8 40.9 47.3 Connecticut .................................................................................37.9 39.5 39.6 35.7 40.3 38.7 43.1 46.6 Maine .................................................................................41.2 42.1 42.1 43.0 39.3 33.4 37.8 36.4 Massachusetts .................................................................................36.0 36.3 36.5 32.9 34.3 30.7 37.6 49.0 New Hampshire .................................................................................61.4 61.9 60.3 66.0 60.0 61.2 62.1 62.0 Rhode Island .................................................................................40.4 41.9 40.4 41.9 43.9 38.1 42.0 40.8 Vermont .................................................................................41.0 41.6 41.9 44.6 42.4 41.7 41.4 40.5
Mideast.................................................................................32.0 33.1 32.3 32.9 33.6 29.8 32.0 35.2 Delaware .................................................................................14.8 15.1 14.9 15.9 14.1 13.6 15.2 16.2 District of Columbia.................................................................................26.4 25.9 24.9 26.5 37.5 28.5 27.6 22.4 Maryland .................................................................................23.4 27.0 27.2 25.9 28.0 24.4 26.7 29.4 New Jersey .................................................................................45.1 46.1 46.3 46.6 44.6 40.3 43.9 50.7 New York .................................................................................30.7 31.9 30.2 32.0 33.4 28.8 32.1 35.9 Pennsylvania .................................................................................29.1 29.3 29.0 28.3 27.8 26.5 26.1 26.1
Great Lakes.................................................................................34.9 34.8 33.8 32.8 36.0 33.6 36.8 36.9 Illinois .................................................................................38.0 39.6 38.1 38.1 38.6 34.2 35.7 36.7 Indiana .................................................................................35.8 32.5 35.2 34.6 30.7 32.0 35.6 36.8 Michigan .................................................................................36.6 35.8 32.0 29.0 42.7 38.2 42.5 37.5 Ohio .................................................................................28.7 28.7 29.4 28.8 29.7 28.2 33.6 37.7 Wisconsin .................................................................................36.4 36.3 34.7 33.4 34.9 34.6 35.0 34.5
1. Have declined somewhat over last 30 years
2. Highest in New England, less in Great Lakes, even less in Mideast.http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=517
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Schematic (Fisher text)
Rule
Tax Variable
Agent
Actual or True Mkt Value
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Schematic (Fisher text)
Rule
Tax Variable
Agent
Actual or True Mkt Value
Assessed orTaxable Value
Ratio ruleExempt Property
Assessor
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Schematic (Fisher text)
Rule
Tax Variable
Agent
Actual or True Mkt Value
Assessed orTaxable Value
PropertyTax Levy
Ratio ruleExempt Property
Assessor
Rate andTax Limits
TaxingGov’t
ReferendumRequired or Optional
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Schematic (Fisher text)
Rule
Tax Variable
Agent
Actual or True Mkt Value
Assessed orTaxable Value
PropertyTax Levy
PropertyTax Revenue
Ratio ruleExempt Property
Assessor
Rate andTax Limits
TaxingGov’t
ReferendumRequired or Optional
Tax Collector
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How Property is Assessed
• Comparative Sales, or “Comps” – What has been the value of other recently sold properties?
• Cost Approach – How much did the property cost to build?– How much have construction costs changed?– How much has it depreciated?
• Income Approach– What is net present value of income to be generated
by property?
Most oftenfor residences.
Cost and income approachesare most often used for
commercial property.
Valuations as golf courses, for example, are often based on
how much they can earn.
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Comparables
• If you’re buying (appraising) a house, you do this.
• Look at house you’re buying (appraising)– Find other comparable houses.– See how they differ.– Adjust values based on differences.
• (Sometimes) float baseline values up according to neighborhood specific inflation factors.
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Adjustments to make “comparable”
similar to appraised house
Better than subject house, so you adjust this downward.
Larger than subject house, so you adjust this downward.
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On-Line Tools
• There are also on-line appraisal tools
• Here’s one.– http://www.zillow.com
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Proposal A in MichiganProposal A Spreadsheet
Tax RateRate 1.5%
Value % CPI Taxable Effective Taxes on MobilityYear Value Increase Inflation Value Taxes Rate Value Tax
1994 200,000 200,000 3,000 1.50% 3,000 01995 220,000 10.0% 2.5% 205,017 3,075 1.40% 3,300 2251996 240,000 9.1% 2.8% 210,808 3,162 1.32% 3,600 4381997 255,000 6.3% 2.9% 216,992 3,255 1.28% 3,825 5701998 265,000 3.9% 2.2% 221,766 3,326 1.26% 3,975 6491999 275,000 3.8% 1.3% 224,704 3,371 1.23% 4,125 7542000 290,000 5.5% 2.2% 229,723 3,446 1.19% 4,350 9042001 300,000 3.4% 3.5% 237,686 3,565 1.19% 4,500 9352002 320,000 6.7% 2.7% 244,183 3,663 1.14% 4,800 1,1372003 360,000 12.5% 1.4% 247,581 3,714 1.03% 5,400 1,6862004 400,000 11.1% 2.2% 253,131 3,797 0.95% 6,000 2,2032005 420,000 5.0% 2.6% 259,713 3,896 0.93% 6,300 2,4042006 420,000 0.0% 3.5% 268,868 4,033 0.96% 6,300 2,2672007 400,000 -4.8% 3.2% 277,516 4,163 1.04% 6,000 1,8372008 375,000 -6.3% 2.9% 285,472 4,282 1.14% 5,625 1,343
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Housing -- Why is it Different?
• Why?– Housing is heterogeneous– Housing is immobile– Housing is durable– Housing is expensive– Moving costs are high– Neighborhood comes with housing … and it
matters!
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Heterogeneous?
• Dwellings differ in:– house size (sq. feet)– lot size (sq. feet)– configuration– quality
• People seem to value these qualities differently.
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Immobile?
• It is where it is. Where you buy it, you get:– Accessibility (to good and bad things)– Package of local public services– Environmental quality
• Further– You can’t (really) “move” houses– You can’t rebundle them (use half of two
different houses at the same time).
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Price: The Hedonic Approach
• Hedonic approach looks at house as a bundle of components.
• Analogy: Suppose that when you went to the grocery store, all you could buy were “filled” shopping carts (food, soaps, etc.), and each one had a price.
• You know what’s in them, but you can’t take things out or put things in.
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Price: The Hedonic Approach
• How do you figure out what the individual components are worth?
• A> If you had a large sample of carts, and each had different amounts of goods in them, then you could come up with the value of the individual components.
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Hedonic Prices
P (ln P) = P (House, Neighborhood, Location, Services)
P (ln P) = P (h1, …, hi, n1, …, nk, l1, … lj, s1, …, sm)
Usually estimated as:
P = i aihi + k bknk + j cjlj, + m dmsm
These give you the coefficients:
The “hedonic price” of housing component i, for example, is:
P/ hi = ai
If P is in log form, then:
P/ hi = aiP
We’ll spend a lecture on this stuffafter the exam.
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Example for Hedonic Prices
• Suppose that sq. feet of living space was ALL that mattered in the price of house.
• You collect data on lots of houses.
Sq. feet
Pri
ce
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Example for Hedonic Prices
• What does this suggest?– A> Bigger
houses have more value.
• Let’s draw a line.
Sq. feet
Pri
ce
?
?
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Example for Hedonic Prices
• Line has a form:
Price = a + b*size
Sq. feet
Pri
ce
• What does a mean?
• What does b mean?
a
slope = b
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Example for Hedonic Prices
• Says that for each additional sq. ft., house price is $b more.
Sq. feet
Pri
ce
• Although it is hard to think of, we could draw this diagram in n dimensions!
a
slope = b
b is the hedonic price of house size.
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n dimensions?
Let’s look at a house with 2000 sq.ft., 5 rooms for $75,000 Pr
ice
Sq. feet20005
75
Let’s look at a house with 3000 sq.ft., 6 rooms for $100,000
3000
6
100
Rooms
Line has a form: Price = a + b*size + c*rooms
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How do you do this?
• Let’s look at the examples from the Brasington Database.• Parameter Estimates
Parameter StandardVariable Estimate Error t Value Pr > |t|
Intercept 11962 927.66440 12.89 <.0001bedrooms -3581.51 302.64817 -11.83 <.0001agehouse -496.30 6.47546 -76.64 <.0001buildingsqft 93.62 0.34959 267.79 <.0001
• R2 = 0.5294• SER = 65629
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Parameter StandardVariable Estimate Error t Value Pr > |t|
Intercept -2983.78 960.58704 -3.11 <.0001bedrooms -6066.13 302.92296 -20.03 <.0001
brick 4990.21 432.77493 11.53 <.0001
fullbath 22079 440.67336 50.10 <.0001agehouse -372.20 6.83443 -54.46 <.0001buildingsqft 83.86 0.39310 213.32 <.0001
• R2 = 0.5404• SER = 64854
Or
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Prediction is Important!• The prediction accuracy threshold employed by the
automated valuation model (AVM) industry is that at least 50% of the predicted house prices must be within 10% of observed transaction prices.
• Goodman and Thibodeau (2007) find:
Standard Spatial SM PSF SM Hybrid
Percent within 10% 35.53% 66.04% 62.90% 65.06%
Percent within 15% 50.86% 78.73% 76.69% 78.32%
Percent within 20% 63.32% 86.11% 85.49% 86.74%
• Why is this important?– If you predict too low, you lose money– If you predict too high, you incite costly appeals.
SM = submarket
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Analyzing the property tax
• If we look at land, labor, and capital, the property tax is a tax on plant, land, and equipment, but not on labor.
• As a result property tax will be borne by– Owners of the property and/or– Consumers of the goods that are made by the taxed.
• Much of the analysis comes from an (almost entirely unreadable) article by Peter Mieszkowski, “The Property Tax: An Excise Tax or a Profits Tax,” Journal of Public Economics, 1972
• Also McLure, Charles E., Jr., "The 'New View' of the Property Tax: A Caveat,". National Tax Journal, Vol. 30 (March 1977), pp. 69-75
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How Mobile is Capital?
• From town to town, ultimately pretty mobile.
• For the country as a whole, possibly not very mobile.
• What does this mean?
Suppose the supply elasticity of capital is 0!
Suppose the supply elasticity of capital is 0!
S$
Amount of Capital
D = MPcapital
Income from Capital
r0
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If we impose a national property tax?
• Effective demand shifts down.
S$
Amount of Capital
D = MPcapital
Income from Capital
r0
(1-t)r0
• Who pays the tax?
TAX
Why?Why?
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We don’t have a national property tax … but
• Suppose we have 1000 municipalities and none of them impose a property tax.
• Now, suppose that one of them (Southfield) imposes a 2% property tax.
• We want to look at Southfield … and at the rest of the world.
• What happens to capital in Southfield … and what happens elsewhere?
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Southfield … and elsewhereSouthfield
LR Supply, why?
Demand
$
Amount of Capital
Elsewhere
LR Supply, why?Demand
$
Amount of Capitalb0 B0
After-Tax Demand
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Where does the capital go?Southfield
LR Supply
Demand
$
Amount of Capital
Elsewhere
LR Supply
Demand
$
Amount of Capitalb0 B0
After-Tax Demand
Everywhere Else!Everywhere Else!
B1
b1
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What has happened?Southfield
LR Supply
Demand
$
Amount of Capital
Elsewhere
Demand
$
Amount of Capitalb0 B0
After-Tax Demand
B1
b1
Price of capitalwent up a LOTin Southfield
This is an excise tax
effect!
Return to capital went
down by0.02/1000
Elsewhere.
LR Supply
Prices of items made
with capital in Southfield
a lot.
Prices of items madewith capitalelsewhere
a little.
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Remember
• This was only 1 city in 1,000.• Suppose a second city passes a 2%
property tax. Big excise tax there; little capital tax
elsewhere.• Suppose eventually that every one of them
passes a 2% property tax.• What do you have? A national property
tax!
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What has happened?Southfield
LR Supply
Demand
$
Amount of Capital
Elsewhere
Demand
$
Amount of Capitalb0 B0
After-Tax Demand
B1
b1
r0 (1 – 0.02)
Allocation of capital isthe same as at the beginning.
Return is 2% lower!
LR Supply
r0 (1 – 0.02)
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So … what do we have?
• The tax differentials between jurisdictions function as excise taxes (if there is a “national” property tax of 2%, then a jurisdiction w/ taxes of 3% will incur excise tax effects).
• The overall weighted property tax functions as a national tax on capital and land.
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Incidence
• Incidence depends on:– Excise tax effects (probably somewhat
regressive)– Capital ownership effects (probably somewhat
progressive).
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Who pays?
• Carroll and Yinger (1994) look at $1.00 increase in city property taxes used to produce $1.00 of services for renters.
• They find that landlords bear between 70 and 91% of the increase because tenants are relatively more mobile than landlords.