LECTURE AT XIAMEN UNIVERSITYLECTURER: JACK WEN-CHIEH WU

ASSOCIATE PROFESSOR, DEPARTMENT OF PUBLIC FINANCE, NATIONAL CHENGCHI UNIVERSITY

Effective Property Tax Rate

Outline

Overview of Property TaxSplit-rate Property Tax System in TaiwanMeasuring Effective Property Tax Rate for

TaipeiThe Link Between Effective Property Tax

Rate and Property Characteristics

Property 財產 v.s. Wealth 財富

Property: something that someone ownsWealth: the money value of propertyProperty 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

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.

Broadly Defined Property Tax

According to OECD classification, taxes on property include:

1.taxes on immovable property2.taxes on net wealth3.Estate, Inheritance, and gift taxes4.Taxes on financial and capital transactions5.Others

Property Tax Base

Market value of property The tax base of property tax is supposed to be

the market value of propertyAssessment 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.

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

Market Value Approach 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.

Income Capitalization Approach 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.

Replacement Cost ApproachReplacement 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.

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.

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.

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.

Effective Property Tax Rate

The effective tax rate is the ratio of the tax paid to the market value of the property:

= T/V.

Substitution for V gives the relationship

= at.

Hence, the effective tax rate is a combination of the nominal tax rate and the assessment ratio.

Evidence from USA

Residential Property Tax Rates in Selected Cities (1998)

Nominal tax rate Assessment Ratio Effective tax rateCity (%) (%) (%)Milwaukee, Wis. 3.03 99.1 3.00Detroit, Mich. 5.76 40.7 2.34Fargo, N. Dak. 47.99 4.2 2.02Coulumbia, S.C. 36.25 4.0 1.45Chicago, Ill. 8.84 16.0 1.41Washington, D.C. 0.96 97.0 0.93Source: Government of Dthe District of Columbia, Tax Rate and Tax Burden:

A Nationwide Comparison, 1998, Table 4, p.19.

More Evidence from USA

Residential Property Tax Rates in Selected Cities (1995)

Effective tax rateCity (%)Bridgeport, CT 4.75Newark, NJ 3.68Milwaukee, WI 3.58Des Moines, IA 2.98Houston,TX 2.67Philadelphia, PA 2.64Jaksonville, FL 2.20Phoenix, AZ 1.82Portland, OR 1.80Chicago, IL 1.79Memphis, TN 1.53Boston, MA 1.39Minneapolis, MN 1.34New York City, NY 0.86Los Angeles, CA 0.74Source: Statistical Abstract of the United States 1997 , Table 497.

Country Tax Base Nominal Tax Rate Estimated Effective Tax Rate

Austria Assessed standard value

Basic Federal rate of 0.2%

0.5%

Finland Taxable value 0.22%~0.5% 0.36%France Notional rental

valueCertain coefficients to half

0.5%

Germany Taxable value 0.35% federal rateMunicipal coefficient:2.8~6

1.5% on average(0.98%~2.1%)

Greece Assessed value Progressive rate 0.3%~0.8% (State)0.025%~0.035%(local)

0.57%

Italy Imputed rental income

0.4%~0.7% 0.5%

Netherlands Public valuation 0.1%~0.9% 0.5%Portugal Valuation code 0.7%~1.3% 1%Spain Cadastral value 0.4% urban,

0.3% rural0.4%

Evidence from EU

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 .

Taiwan’s Property Taxes

Narrowly defined property tax

Broadly defined property tax

Land Value Tax 地價稅 Land Value Tax 地價稅House Tax 房屋稅 House Tax 房屋稅

Estate, Inheritance and Gift Tax 遺產贈與稅 ( 中央 )

Deed Tax 契稅Security Transaction Tax 證券交易稅( 中央 )

Future Transaction Tax 期貨交易稅 ( 中央 )

Stamp Tax 印花稅Land Value Incremental Tax 土地增值稅( 房屋增值稅納入綜合所得稅 )

License Use Tax 使用牌照稅

Taiwan Tax System

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.

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.

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.

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%.

Progressive Rates of Land Value Tax

Range of Land Value Marginal Tax Rate

Land Value (note 1) < Starting Threshold (ST) (note 2) 1%

ST< Land Value < 5*ST 1.5%

5*ST< Land Value < 10*ST 2.5%

10*ST< Land Value < 15*ST 3.5%

15*ST< Land Value < 20*ST 4.5%

20*ST < Land Value 5.5%

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.

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.

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.

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.

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.

House Tax Rates

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.

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.

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).

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%.

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.

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.

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.

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.

Effective Tax Rates at Individual Level

Assessment RatioEffective tax rate

maximum 98.583570%0.52005%

99th percentile 56.890440%0.28312%

95th percentile 41.425640%0.20591%

90th percentile 35.404470%0.17595%

75th percentile 27.718280%0.14218%

50th percentile 21.862430%0.11471%

25th percentile 17.725180%0.09376%

10th percentile 14.788640%0.07820%

5th percentile 13.136790%0.06935%

1th percentile 10.122110%0.05350%

minimum 1.756660%0.00615%

Mean 23.905940%0.12309%

Standard Deviation 9.42%0.045%

Taipei City

Basic Profile

Zone District Function GDP/capita Mean Price* Unit Price** Pop. ratio

Old Datong Historic 1,350,999 748 25 4.75%

Old Wanhua Historic 1,232,736 610 22 7.25%

Fringe Zhongzheng Political 1,708,344 971 35 6.08%

Fringe Zhongshan Political 1,471,139 897 26 8.34%

Central Daan Financial 1,866,542 1163 38 11.96%

Central Songshan Financial 1,620,002 927 30 8.01%

Central Xinyi Financial 1,659,104 849 27 8.67%

Fringe Nangang Industrial 1,352,611 703 23 4.33%

Suburban Neihu Industrial 1,555,502 776 22 10.19%

Suburban Shilin Culture 1,624,831 896 25 10.89%

Suburban Beitou Recreation 1,475,992 716 21 9.51%

Suburban Weshan Education 1,540,305 660 21 9.98%

Effective Tax Rate

District Mean tax rate Median tax rate Standard deviation

Datong 0.1142% 0.1026% 0.0444%

Wanhua 0.1105% 0.1074% 0.0367%

Zhongzheng 0.0930% 0.0844% 0.0471%

Zhongshan 0.1105% 0.1040% 0.0419%

Daan 0.0911% 0.0824% 0.0382%

Xinyi 0.0867% 0.0789% 0.0331%

Songshan 0.0924% 0.0821% 0.0412%

Nangang 0.1069% 0.0895% 0.0471%

Neihu 0.0836% 0.0805% 0.0246%

Shilin 0.0779% 0.0726% 0.0281%

Beitou 0.0828% 0.0774% 0.0280%

Weshan 0.0860% 0.0804% 0.0282%

Whole Taipei 0.0912% 0.0829% 0.0364%

Assessment Ratio

Max Min Average Median Standard Deviation

Shilin 0.959163 0.072766 0.227145 0.208128 0.094281159

Datong 0.982054 0.085654 0.285919 0.261333 0.123517493

Daan 0.865928 0.078071 0.245173 0.224139 0.097422656

Zhongshan 0.945537 0.06431 0.266169 0.247347 0.104440393

Zhongcheng 0.93837 0.115859 0.268209 0.241919 0.117056327

Neihu 0.640307 0.071391 0.205071 0.195097 0.061785022

Wenshan 0.91505 0.030581 0.225689 0.21134 0.075738607

Beitou 0.655623 0.028608 0.22725 0.209418 0.08756853

Songshan 0.587363 0.022534 0.238232 0.223447 0.080671151

Xinyi 0.809658 0.062274 0.25648 0.236767 0.103844435

Nangong 0.536957 0.108182 0.211149 0.195289 0.069300413

Wanhua 0.985836 0.017567 0.292225 0.273433 0.1138614

2002 0.9858 0.0623 0.2777 0.2590 0.1039

2003 0.9592 0.0706 0.2827 0.2587 0.1087

2004 0.9821 0.0378 0.2371 0.2171 0.0912

2005 0.8878 0.0225 0.2250 0.2082 0.0838

2006 0.9455 0.0176 0.2091 0.1933 0.0785

Tall building 0.9455 0.0643 0.2198 0.2037 0.0791

Low apartment 0.9858 0.0225 0.2560 0.2360 0.1025

Single house 0.6554 0.0176 0.2875 0.2763 0.1156

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.

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.

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.

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.

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

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.

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12

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nPDUMMYXDUMMYETAXRATE Ptt

tPdd

dP

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,, TtXDUMMYETAXRATE tPtPtd

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Table 8

Empirical Findings

We find that the effective property tax rate is higher for a property which is new, located in the tall building, and located at old and less developed area. Moreover, we find that the effective property tax rate falls with the size of floor area, but rises with the size of site area. Furthermore, we find that a property in a poor area pays on average a relatively higher effective property tax rate than the one in a wealthy area, suggesting a regressive property tax system in Taipei.

Policy Implications

First, the effective property tax burden is still under-rated, especially for those properties in wealthy areas of Taipei. Therefore, the tax authority should make more efforts to raise the effective property tax rates paid by wealthier households in order to reduce the regressive degree of property tax system in Taipei. Second, the systematic assessment biases made by two independent assessment committees should be lowered in order to raise the assessment ratios. In particular, both appraisal committees should cooperate with each other in order to improve the quality of value appraisal result. Moreover, if both committees can be integrated into one single committee, then the assessment value biases may be able to be reduced.