11.6 Evaluation Criteria

In evaluating property taxes from an equity perspective, effective tax rates serve as an important measure of tax burden relative to the ability to pay. Two possible approaches can be used: one involves calculating taxes divided by income, and the other divides taxes by market value.

Horizontal equity refers to the principle that individuals or properties with the same ability to pay should be taxed equally. However, horizontal inequities can arise due to inaccurate assessment values. Even with accurate assessments, horizontal inequities may still occur if the measure of ability to pay is based on income rather than property value.

Vertical equity, on the other hand, addresses how tax burdens differ based on different levels of ability to pay. For residential properties, the tax burden typically falls on the homeowner. In the case of rental and business properties, the tax burden may be borne by landlords, tenants, owners, employees, or customers, depending on the prevailing market conditions.

	Family A	Family B	Family C
Household size	8	2	2
Income	80,000	30,000	80,000
Adjustment factor	1.32	0.80	0.80
Adjusted income	60,606	37,500	100,000
Assessed value	250,000	100,000	250,000
Tax rate	2%	2%	2%
Taxes liability	5,000	2,000	5,000
ETR (Adjusted income)	8.25%	5.33%	5.00%

Source: Adjustment factors

In evaluating the efficiency of property taxes, key questions center around whether the tax distorts economic decisions and the extent of these distortions.

The distortion of economic decisions can affect various areas. It can influence consumption decisions, particularly the choice between housing and other goods. It may also impact investment decisions, such as how much individuals or businesses invest in real estate. Additionally, business production decisions could be altered by the tax, affecting how businesses allocate resources. Finally, property taxes can influence location decisions for both individuals and firms, as tax rates may lead them to choose one location over another.

Adequacy in property tax evaluation focuses on the variations in revenue-raising capacity across different jurisdictions. These variations can be attributed to differences in wealth, with wealthier areas having a higher capacity to generate revenue. The presence of large industries can further increase a jurisdiction’s ability to raise revenue. On the other hand, exemptions can undermine the capacity to generate revenue by reducing the taxable base.

Elasticity refers to the potential for increasing tax revenue as incomes grow, without altering the tax base or the tax rate. This depends on the relationship between income growth, the market value of homes, and the method used for property assessments. A more elastic system can adapt to economic growth, ensuring that revenue increases naturally as the economy expands.

Feasibility in property tax systems is often influenced by the complexity of property assessment, which is considered the most challenging aspect. There is a trade-off between achieving horizontal equity and managing administrative costs. While property taxes are generally politically feasible, they are highly visible to taxpayers because they are often paid in a lump sum, either annually or semi-annually. Elected officials may hesitate to raise commercial property tax rates out of concern that higher taxes could drive businesses out of the area.

In terms of stability, property taxes benefit from a broad tax base, which typically experiences little fluctuation over time. However, fluctuations in tax revenue can occur due to changes in property assessments, making assessment practices a key factor in the overall stability of the property tax system.