Property. TaxationinGovernment Hance

By C. I DWELL HARRISSProfessor of Economics, Columbia Universit y

Economic Consultant, Tax Foundatio n

Tax Foundation, Inc .50 Rockefeller Plaz aNew York, N .Y. 10020

—Copyright 1 974

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Foreword

This study has been designed to ai din a general understanding of propertytaxation. Although many Americanshave some direct familiarity with th eproperty tax where they live, respon-sible citizen action requires a broaderknowledge .

Property taxes as they are actuallyimposed, differ considerably, not onlyfrom one part of the country to anotherbut also within the same state and a ttimes within a metropolitan area . Someof the tax, notably that falling on publicutility and other business property, i slargely hidden and easily overlooked —but nonetheless deserving of attention .i he quality of administration variessubstantially ; defective administrationhas implications for equity and eco-nomic results which need attention .And, of course, any tax as heavy as isproperty taxation in many localities wil lhave economic effects of significancebeyond the raising of revenue .

The factual evidence presented herewill enable the reader to get a betterperspective than is possible from direc texperience in one community or fromthe typical references in public discus-sions. Because of the unusual aspects ofactual application of this tax, the studydeals with major administrative prob-lems. Readers can thereby learn aboutthe possibilities for improvement .

Modern economic analysis of prop-erty taxation has confirmed some con-clusions of long standing while leadingto some modification of others, such asshifting and incidence. Although un-certainties remain, the study attempt sto do justice within necessarily limitedscope to current thinking . A discussionof possible alternatives for improvin gproperty taxation will, it is hoped, con-r. . ibute to citizen ability to advance theimportant goal of better government.

A grant from the John C . LincolnInstitute of the University of Hartfor dassisted in the preparation of this study .Any expressions of opinion are my own ,of course, and not necessarily those ofthe Lincoln Institute, The Tax Foun-dation, Inc., or any other organizationwith which I am associated.

Tax Foundation, Inc., is a publiclysupported, non-profit organization ,founded in 1937 to engage in non-parti-san research and public education onthe fiscal and management aspects o fgovernment. Its purpose is to aid in thedevelopment of more efficient and eco-nomical government . It serves as a na-tional information agency for individ-uals and organizations concerned withproblems of expenditures, taxes anddebt.

C. Lowell Harris sNovember 1974

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Table of Contents

PAGE

1. SUMMARY 9

II. DESCRIPTION 11

Revenue and Current Burden 11What The Property Tax Is—And Is Not

12Local Revenue Source 12Many Differences from Place to Place 14Economically Two Taxes, Not One 14"Only People Pay Taxes" 15What Is Taxed? 16Relates to Property Rather than to Personal Position 16Exempt Property 18Classification versus Uniformity 20Railroad, Public Utility, Bank, Insurance Company, and Som e

Other Business Property 20Constitutional and Statutory Ceilings on Property Tax Rates 21

III. ADMINISTRATION 22

Assessments Depend Upon judgments 22Assessing Staff 22Listing Real Estate and Other Properties Subject to Taxation 23Valuation 24Bases of Valuation 26Judging Quality of Assessment : Sales-to-Assessment Ratios 27Quality of Assessment Results . . .

29Opportunity for Owners To Get Assessments "Corrected" 29Equalization of Assessments 30Use of Private Appraisal Firms 31Setting the Tax Rate 32

IV. WHO BEARS THE BURDEN OF PROPERTY TAXATION 33

Complexity of Tax Shifting : Introductory Comments 33Land : Capitalization of Tax 34Tax on Buildings and Machinery 35Some Property Tax Will Not be Shiftable and So Remains on the

Suppliers of Capital 37Estimates of Distribution of Burden 39Equity of Tax 40Revenue Yield and Other Bases for Judging Property Taxation 44

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V. NONREVENUE EFFECTS 45

General Considerations 46Influence on Land and Its Use 46Buildings, Machinery, and Other Man-made Capital 47

VI. IMPROVING PROPERTY TAXATION 54

Relief for Specific Hardships, Especially the Aged : Circuit-Breakers, 54Administration 55Enlarging the Size of Taxing Units 55Basic Restructuring : Shifting More of the Burden from Man-mad e

Capital to Land 56Arguments Against Proposed Basic Restructuring

50Other Possible Revisions of Methods of Taxing Property 60School Finance and Property Taxation : Judicial Decisions 60

List of Table sTABLE

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1. Property Tax Revenues in Relation to Net National Product, Selecte dCalendar Years, 1929-1973 12

2 . State and Local Property Tax Collections by State, Fiscal Year 1972 13

3. Estimated Local Property Tax Collections, By Source, 1972 15

4. Exempt Property by Type, Percentage Distribution, 1971 18

5. Percentage of Assessed Value to Sales Prices of Sold Properties, Single-Family Nonfarm Houses, Selected States, 1971 28

6. Distribution of States According to Aggregate Assessment-Sales Ratio sfor Major Use Categories, 1971 29

7. Assessment Uniformity, Single-Family Nonfarm Houses, Selected States,1971 30

8. Property Tax as a Percentage of Family Income by Income Class : Esti-mates Based on Alternative Assumptions, 1966 40

9. Property Tax as a Percentage of Family Income by Population Decile :Estimates Based on Alternative Assumptions, 1966 40

10. Real Estate Taxes Per $1000 Value, by Value Class and Region, One -Housing-Unit Homeowner Properties, 1971 41

11. Real Estate Taxes as Percent of Income, by Income Class and Region ,One-Housing-Unit Homeowner Properties, 1971 42

12, Tax Burdens and Benefits of Government Spending by Income Class,1965 43

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Summary

Property taxation, yielding $47 .2 bil-lion in 1973, continues to be a majorsource of revenue for vocal govern-ments. Their viability and indepen-dence may well depend upon theirability to utilize this source, one notused at all by the Federal governmentand only slightly by a few states . Prop-erty taxation as it actually exists differ sgreatly from state to state and withi nstates. Therefore, generalizations mus tbe used with caution .

The tax applies to real property, landand buildings, and in most states to themachinery and inventory of businesses .It does not apply to the tangible per-sonal property of families (except i nsome cases autos) or to intangible per-sonal property. The average burden pe rcapita in 1972 was $202 and $49 pe r$1,000 of personal income, but amountsdiffered widely. Revenues more thandoubled in the last decade, giving evi-dence of upward elasticity.

Administration in most states is alocal responsibility . The quality differsgreatly. In much of the country in -equality of assessment continues to b ehigh, but in some places substantia lprogress has been made in reducingdisparities. Administration rests heavilyupon the judgments of assessors as tovalue. Improving the quality of assess-ments requires action of several kinds .Among other things, many assessingdistricts should be enlarged to permitthe operation on a scale large enoug hto be efficient . Professionalization ofstaff is needed to permit the develop -

ment of career opportunities based o nmerit. Other needs are protectionagainst political pressures to reduceassessments and an increase in theavailability of various kinds of datawhich help to indicate value . Comput-ers can be used efFectively in some as-pects of mass appraising. Specializedcommercial firms can serve usefully inmajor reassessments . Facilities for theappeal of proposed assessments can beimproved in many cases.

Economic analysis leaves some doubtabout how the burden of the tax is ac-tually distributed. Economically, "the"property tax consists of two markedlydifferent elements . One bears on land ,the other on man-made capital . Becausethe supply of land is largely fixed bynature economists conclude that the taxon pure land values is capitalized intolower land price and thus rests on th eowner of land at the time the tax goesinto effect . In contrast, the tax on build-ings, machinery, and other man-mad ecapital will influence the quantity of th eproductive resource, including housingand public utility facilities . Therefore ,some or much of the tax will be a costto businesses and the suppliers of renta lhousing, a cost which is shiftable to theuser. But some of the tax may not b epassed on to consumers; this portionwill reduce the after-tax net returns toinvestors and will thus rest on thesuppliers of capital .

Whether the burden of the propertytax is predominantly proportional wit hincome, bears relatively more heavily

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on lower income families (regressive) ,or increases as a percentage of incom eup the income scale (progressive) re -mains subject to debate. Facts un-doubtedly differ from one communityto another as do the magnitudes of theburdens. Estimates resting on two al-ternative assumptions about shiftin gare presented. Recent relief provisions("circuit breakers") moderate, some -times substantially, the burden o nlower-income families, especially thoseover age 65 .

Property taxation in much of th ecountry is at rates high enough to hav eeffects which are significant beyond therevenue yielded. The tax influences theuse of land, competition for industry,community growth, and the mainte-nance and modernization of housingand business facilities . High tax rate sincrease pressures for exemption andmay powerfully affect incentives forzoning and other determinants of de-velopment over metropolitan areas . Be-cause of the local nature of propertytaxation, including actual administra-tion, the effects (other than revenu eyield) differ from one area to another.But relatively heavy burdens — such a s3 or 4 percent a year on full capitalvalue — on new man-made capital mus tdeter construction of new housing an dbusiness facilities .

Opportunities for improving propertytaxation include many aspects of ad -ministration. Achievements in severalplaces demonstrate that assessment ca nmeet standards very much higher tha nare being tolerated in most of thecountry .

Proposals for basic restructuring ofthe tax have support which rests onwidely accepted economic analysis . Taxrates on man-made capital would be re-duced and much more of the revenu eneeds would be met from tax on lan dvalues. One result would be encourage-ment of modernization and expansion o fhousing and new production facilities .Furthermore, local treasuries would ge tmore of the fruits of community devel-opment ("unearned increments" as dis-tinguished from values which resul tfrom imputs of effort and capital) ; thisresult would conform to some concept sof tax equity and justice . Moreover ,owners of land would be under morepressure to put it to "higher and betteruse," as contrasted with "underuse"which may be. dominated by hope forspeculative gain due to communitygrowth.

Court decisions on school financ ehave criticized the inequalities of tax -able property per child in school . TheU . S. Supreme Court decided that th eproblem remains one for state action .

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Description

Current reexamination of the role ofproperty taxation raises old issues in amodern setting. And some issues arenew. For generations this tax has bee nthe mainstay of local government fi-nance. During this period it haschanged in many ways . Today, as itactually operates, property taxatio nvaries tre,.nendously from place toplace. In the society as a whole, how-ever, the tax has an important role .Through the foreseeable future it wil lcontinue to be significant and to deserv eefforts to make it as good as possible .

This study will describe propertytaxation as it exists and its role, not onl yin financing government but also th eeffects it exerts beyond those of revenu ealone. Suggestions for improvement i nadministration and major restructuringconclude the discussion .

Among the issues relevant to an ex-amination of the future of propertytaxation are : the viability of meaningfullocal government with significant au-tonomy; school finance ; the extent towhich rises in land prices are used t ofinance government; aspects of land use,

including open spaces ; urban-suburba nlife; the nature of city growth and re-building; and the environment. Spacelimits here, however, confine the dis-cussion to selected issues .

An opinion survey conducted for theAdvisory Commission on Intergovern-mental Relations (ACIR) found prop-erty taxation to be more disliked tha nother taxes. To some extent, certainly,such dislike results not so much fromcharacteristics of the tax compared wit hthose of other taxes as from the increas ein burdens. This rise has, among otherthings, revealed a greater power to pro -duce revenue than was widely assume dfor many years .

The tax is imposed on capital values .Actual rates range widely . In areas con-taining most of the country's assessedvaluation, the annual tax exceeds 2 per -cent a year of full capital value. Inmany places the rate is significantlyover 3 percent a year. In some — Bos-ton, Newark, New York City, etc. — itis above 5 percent. Such rates applie deach year to full capital value will exer tgreat influence on investment, capita lformation, and the use of property.

Table 1 shows the rise in total yield ,from $16.4 billion in the calendar year1960 to $47.2 billion in 1973. (The an-nual rate estimated in mid-1974 was$51 billion). The tax takes more fro mtaxpayers than ever before — more per

capita, even when adjusted for infla-tion. The 1973 national total was $22 5per capita, or $900 for a family of fouron the average (up from $173 per capitain 1973 dollars in 1965 and $137 in1960). Table 2 shows amounts by state,

Table 1

Property Tax Revenues in Relation to Net National Produc tSelected Calendar Years, 1929-197 3

Property tax

Total Per capita Net natirgal product Property taxesYear (billions) ,WlIons)

pencenet

product national

1929 $ 4.7 $ 39 $

95 .2 4.91936 4.2 33 75.4 5.61944 4.7 35 199.1 2.41950 7.4 49 266.4 2.81955 10.8 66 366.5 2 . 91960 16.4 91 460.3 3 .61963 20.9 111 537.9 3 . 91965 23.9 123 625.1 3 . 81970 37.5 184 889.8 4.21971 41 .3 200 961 .6 4.31972 44.1 212 1052.8 4.21973 47.2 225 1179.1 4.0

Source: U.S. Cepartment of Commerce, Bureau of Economic Analysis.

per capita . Differences are large. In 5states the per capita amount was ove r$275, while in 16 it was wider $125 .

Relating the tax to personal incom emay provide a more meaningful basisfor comparing actual burdens . The U. S .average in 1972 was $49 per $1,000 o fpersonal income; 17 states were under$35 and 10 states were over $60. Table 2also shows interstate variations in th erole of the property tax. In 7 statesproperty tax revenues accounted fo rone-half or more of all state-local taxes ;in 12 states the property tax share wa sno more

one-fourth .

Within many states the variations ofburden, by significant measures, arewide. Such intrastate variations account

for some of the attacks in court, andthe judicial decisions of recent years ,against heavy reliance on property taxa-tion to pay for education.

Table 1 also relates property taxrevenue . . . Ationwide to Net NationalProduct. At the end of World War IIthis measure was at an all-time low . Acontinual but slow rise has brought thepercentage to 4.0, not quite that of the1929s .

Local expenditures, however, haverisen much more rapidly than yield sfrom the property tax . Other local reve-nues, chiefly state and Federal grants ,have gone up so that the relative im-portance of property taxation haslagged behind its dollar increase.

WHAT THE PROPERTY TAX IS -AND Is NOT

Local Revenue Source

The tax is a revenue source for local

government. The people in a com-munity have this means of paying for

services they want. With some excep-tions the tax meets one criterion ofjustice because on a geographical basisthe benefit principle applies . The groupthat pays gets the benefits . It is not

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Table 2

State and Local Property Tax Collections by StateFiscal Year 1972

Property taxes Property taxesProperty taxes psr ;x .000 of as percent of

state por capita personal Income state-local taxes

U .S. Average $202 $49 39

Alabama 43 14 14Alaska 107 23 23Arizona 196 52 39Arkansas 75 25 24California 327 71 48Colorado 204 51 41Connecticut 308 62 49Delaware 99 21 17Florida 143 38 33Georgia 120 34 3 1Hawaii 121 27 19Idaho 142 43 35Illingis 237 50 41Indiana 220 55 50Iowa 229 59 46Kansas 225 54 49Kentucky 74 23 21Louisiana 77 24 18Maine 204 61 43Maryland 175 39 32Massachusetts 324 71 51Michigan 223 51 39Minnesota 232 58 40Mississippi 78 28 23Missouri 158 40 37Montana 257 72 50Nebraska 228 57 50Nevada 210 45 35New Hampshire 248 b6 58New Jersey 310 65 56New Mexico 86 27 21NeW York 290 58 37North Carolina 94 28 25North Dakota 177 50 41Ohio 180 43 43Oklahoma 100 29 27Oregon 223 57 48Pennsylvania 145 35 28Rhode Island 201 49 39South Carolina 79 25 23South Dakota 248 73 54Tennessee 94 29 27Texas 147 40 38Utah 149 44 35Vermont 215 60 38Virginia 118 31 28Washington 193 47 36West Virginia 82 25 21Wisconsin 258 67 43Wyoming 252 65 49District of Columbia

189 32 3 1

SOURCE : U .S, Department of Commerce . Bureau of the Census, and Tax Foundation computations .

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forced to pay for services to personselsewhere .

The effectiveness of local govern-ment — as distinguished from centrali-zation with decisions made by a mor eremote body — will depend heavilyupon financial independence . In prop-erty taxation communities have a con-siderable base of finance to use if an das they wish .

State governments once relied o nproperty taxation. By the end of th e1930's, however, almost all states ha dturned this source over for the use o flocalities. Although states now get som eproperty tax ($1.3 billion in 1972), inonly five did it bring as much as on etwentieth of state tax revenue.

Usually at least three units of govern-ment — school districts ; city, town, vil-lage; and county — sometimes more, taxthe same property. An estimated 66,000separate units of government imposethe tax.

Almost everywhere the property ta xapplies to real estate — land and build-ings — and to business-owned tangiblepersonal property, i .e., machinery andinventory. In only a few areas is the taxapplied to a significant extent to thepersonal property of individuals . Ta-ble 3 shows for 1972 the amounts andpercentage distribution of property taxpayable to local governments on majortypes of property .

The description which follows can -not discuss all features as fully as woul dbe desirable for understanding all theissues of importance . Nor can we pos-sibly give recognition to the wide di-versity over the country .

Many Di#erences fro mPlace to Place

The revenue and burden of the prop-erty tax vary considerably from locality

to locality. Moreover, in the definitionof what is taxed, in administration — inall respects — the tax as actually in ef-fect differs greatly due in part to itslocal nature .

From one generation to the next, be -ginning in the colonial era, propertytaxation has evolved . It has changedfrom time to time and place to place .The same term has applied to taxeswhich differ from each other widely —in theory and in practice. More oftenthan not, what actually existed as arevenue source departed in many waysfrom what the law seemed to call for.Such is still the case in some states .

Differences in economic condition saffect the influence of the tax . Someareas are rural, others urban ; some com -munities are old, others new; some havemuch business property, others ar elargely residential . Such contrasts af-fect the actual importance of propertytaxation. Although almost every home -owner may believe that the tax on hishouse is "high," the effective rates insome places, as suggested by differencesin state averages (Table 2), are only afraction of those in other areas .

Economically Two Taxes, Not One

To understand what property taxa-tion really is, and especially to evaluatepossibilities for improvement, one mus trecognize a vital economic distinction ,rarely made clear.

In a fundamental economic sense ,"the " tax is not one but two . One ap-plies to land, the other to man-madecapital (buildings, machinery, and othe ritems such as commercial inventories) .These two differ basically in their eco-nomic effects. Land is largely fixed i nquantity. Man-made capital must bebuilt and maintained . Land will notmove from one place to another . A

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Table 3Estimated Local Property Tax Collection s

By Source, 1972 a

Amount

PercentageSource

(millions)

distribution

NonbusinessNonfarm residential realty b $19,023 47 . 3Farm realtye 817 2.0Vacant lots 320 0.8

Total nonbusiness realty 20,160 50.1

Nonfarm personaltyd 657 1.6Farm personaltyd 113 0.3

Total nonbusiness personalty 770 1 .9

Total nonbusiness 20,930 52. 1

BusinessFarm realtye 1,860 4.6Vacant lots 480 1.2Other realty f 9,170 22.8

Total business realty 11,510 28 . 6

Farm personaltyg 454 1 . 1Other personaltyb 4,287 10.1

Total business personalty 4,741 11 .8

Public utilities 3,019 7.5

Total business

19,270

47.9

Total

40,200 1

100 .0

a. ACIR staff estimates bases on estimated 1972 collections distributed on basis of 1967 Census data ,latest available statistics .

b. Includes both single-family dwelling units and apartments . An estimated $14 billion, or 36 percen tof all local property taxes, was derived from single-family houses ; about $5 billion or 12 percent o fEstimated tax revenue came from multifamily units .

c. Estimated collectlons from the taxation of the "residential" element of the farm .d. The collections produced through the taxation of furniture and other household effects .a. Estimated collections from the taxation of land and improvements actually used in the productio n

of agricultural products —this is exclusive of the land and buildings used in a residential capacit yby the farmer .

f. Commercial and Industrial real estate other than public utilities .g. T'ie estimated collections from the taxation of livestock, tractors, etc .h. Latimated collections from the taxation of merchants' and manufacturers' Inventory, tools an d

machinery, etc .1 . This is the estimated grand total for local property tax receipts . In addition, there is an estimate d

$1 .3 billion in state property taxes . The data needed for a similar distribution of state receipts ar enot available.

SOURCE : Advisory Commission on Intergovernmental Relations .

"high" tax on buildings and machinerywill raise costs to the user and restrictsupply. Getting the same dollars ofrevenue from land will not reduce thesupply.

Late-, vie shall say more about th esignificance for government finance . Butlet us remember : Property taxation con-sists of elements which are combined

in name and in administration butwhich produce significantly differen tresults as dollars come (1) from val-ues of man-made capital or (2) fromland values.

"Only People Pay Taxes "

People, not things (not gasoline orcigarettes or businesses or real estate) ,

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pay taxes. Property taxation must bethought of as a device to tax peopleaccording to their ownership or use ofproperty. The use may be direct, as inthe case of housing, whether a familyis an owner or a renter; however, muchuse of taxed property is indirect . Asconsumers we get benefits from thebuildings and machinery which help i nproducing goods and services . As work-ers we utilize land, machinery, build-ings, and telephone and electric fa-cilities .

As we invest our savings, they go intoproperty to bring income . We may buyan income-producing piece of real es-tate and pay property tax . Often, how-ever, we turn over savings to an insti-tution or sometimes to a business, get-ting thrift accounts or shares of stockor other securities. These "pieces ofpaper" have worth because behindthem are facilities — solid, tangiblethings; and these are subject to theproperty tax .

What Is Taxed ?

Real property — land and buildings —makes up the vast bulk of what is taxed .Numerous differences of definition o freal property and special provisions re-garding minerals, growing crops, tim-ber, and other aspects affect the detailsof the tax as it actually applies .

All but five states (Delaware, Hawaii ,New York, North Dakota, and Pennsyl-vania) also permit localities to tax tangi-ble personal property of businesses —machinery, airplanes, computers, trucks ,a store 's inventory on its shelves, theparts on a factory assembly line, desks ,cattle, stored crops . Personal propertyof households — furniture, jewelry, artobjects, clothing — is rarely taxed (ex-cept for autos, for which the annuallicense can be used to enforce a prop-erty tax) .

Intangible personal property — suchas stocks, bonds, mortgages, deeds t oreal estate, bank balances — only rarelygive rise to significant property taxa-tion. Such intangibles generally repre-sent claims to tangible property whichin itself is taxed . To tax a homeowneron his house and then also on the dee dwhich shows his title to the propertywould be to tax the same value twice.Much the same applies to other securi-ties . As a rule, therefore, governmentslimit the tax to tangible property . Thatis, they do not as a practical matter alsotry to tax the pieces of paper whic hshow ownership of those things or, a sin the case of a bond, a piece of pape rshowing a debt claim. Federal govern-ment bonds are exempt on constitu-tional grounds .

In the past, it is true, efforts havebeen made to apply the property ta x"doubly," both to tangible wealth andpaper showing ownership. The effortsgenerally failed because of the almostinsuperable difficulty of administerin ga tax with no true economic "rationale ."Investment funds will be repelled fromareas imposing a "second" burden .

The tax rests upon an estimate ofvalue . In determining the tax payable ,the physical characteristics of a pieceof real estate—large or small, modernor deteriorated, center of town or far-ther out —are not taken into accoun texcept as they influence worth .

Relates to Property Rather thanto Personal Positio n

This tax is ad rem, not in personam.Ordinarily, it relates to the property assuch without regard for characteristic sof the owner — family income, occupa-tion, age, profit, sales, or other aspect sof an individual's or a company's statu sor affairs . Yet, as discussed later, some

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characteristics of owners will make theproperty exempt.

Two points need to be noted. Theymay help in understanding the argu-ments about the fairness of propert ytaxation, as compared with other reve-nue sources .

Not a Net Wealth Tax. The tax is nota levy on individual or family netwealth. There is no systematic adjust-ment of burden according to net worth .The amount of debt against a house ,for example, will not affect the tax duefrom the owner. Two neighborin ghouses may each be worth $30,000. Oneowner may have no debts so that hi sownership (equity) in the house is it sfull value. The other may owe a mort-gage of $25,000 so that his equity i s$5,000. The property tax may be th esame in the two cases .

The tax on business property is col-lected from the company without re-gard to possible differences in th eability to pay of the owners of theshares of stock or the consumers t owhom the tax may be shifted. The ra-tionale for the tax does not rest upo na presumed adjustment of burden to aperson's net worth or to his net incom e—nor does the tax rest on his tota lconsumption as do broadly based sale staxes .

Presumably the government servicesreceived by residents of the communityrelate much more closely to the prop-erty used there than to the net invest-ment (worth) of the owners . To the per-sons living and owning property in alocality, the benefits they get from loca lexpenditures do not depend upon thenet ownership above the debts of th evarious families .

Assume, for example, two communi-ties which have much the same total

value of real estate per capita, includ-ing about the same number of dwell-ings. In one, however, the owners havepaid off a large fraction of the mortgagedebt. The second has more newcomer swho still owe relatively large amounts .The homeowners in the two towns hav econsiderably different net worth in thei rhouses . Nevertheless, they may ge tabout ' ic same in services from loca lgovernment. So essentially equal taxesmay in a logical sense be fair an dequitable .

Not an Income Tax. Nor is the prop-erty tax an income tax. Criteria whichwe believe to be appropriate for judg-ing net (or gross) income taxation ar enot necessaril-7 the best for evaluatin gproperty taxation . Although paymen tordinarily comes out of income fromsome source — homeowner's salary, acompany's sales — the tax base is gros scapital value. The value of a piece ofproperty, of course, relates to the "in -come" from it — (1) the present moneyincome plus (2) the worth of curren tservices (imputable income, such as thevalue of occupancy by an owner) plu s(3) the present worth of the expectedbenefits to be received in the future —i.e., the future income and other bene-fits discounted to their present value .

Today's money income is not the onlything affecting the worth of a piece o fproperty. Increments of value to berealized later — e .g., from communitygrowth — are at times an importan tpart of what the owners "receive ." Ac-tual and potential owners try to takeaccount of such increases in their de-cisions . Current cash income may be offar less weight in determining the worthof land than are hopes for the future .Increments of land value can be sig-nificant long before they are realized bysale. Property tax assessment will not becorrect if it ignores them .

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Table 4

Exempt Property by Type ,Percentage Distribution, 197 1

16 States and theDistrict of Columbia °

Percent ofType

total exempt propert y

Religious 10.4Education 12 . 1Charitable 3 . 1Government 58 . 6Other 15.8

a . The states for which figures were obtained ar eArizona, California, Florida, Hawaii, Indiana ,Kansas, Louisiana, Massachusetts, Minnesota ,Nevada, New Jersey, New York, Ohio, Oregon ,Rhode Island, and South Dakota .

Source: 1972 Census of Governments, Vol, 2 ,Part 1, p. 14 .

Exempt Property

Widespread uneasiness about exemp tproperty has not yielded agreement o nwhat would be desirable and feasible .Figures are incomplete partly becaus eassessors have little reason to devot etime and energy to accurate listing andvaluation of property on which no taxwill be due. Table 4 shows the percent -ages of total exempt property by majo rtypes for 16 states and the District o fColumbia .

Governmental. Governmental prop-erty takes up the largest group. A lo-cal government's exemption of its ownproperty seems sensible . What wouldbe gained by taking money out of onepocket taxing streets and the firehouses, schools and parks —to put inanother pocket? Although to requir etaxes seems foolish, there is one goo dreason to require careful estimates t oshow the worth of exemption on gov-ernmental property . The figures woul dhelp in judging (1) the value of re-sources used in providing various gov-ernmental services and (2) the relativecosts of alternative locations .

Additional problems arise when theproperty of one governmental jurisdic-tion lies within another — a state high-way or a post office or a Federal hos-pital in a school district . Exemptingsuch property may be often requiredby either the constitution or statutes ,Nevertheless, figuring the dollar cost ofthe exemption can serve useful pur-poses. Otherwise, the full costs of ser-vices from the exempt property canno tbe known. Moreover, a good statementof the amount exempted will help ingetting governments to see how muchtheir own activities take off the tax rol land perhaps prod them toward makin gmore adequate compensation paymentsin lieu of taxes . Some communities haverelatively more exempt property o fother governments than do others ; fair-ness as well as efficiency in resourceallocation could be served by betteraccounting of the cost of exemption.Furthermore, intergovernmental finan-cial relations could benefit from the de-velopment of more extensive and morerefined payments in lieu of taxes; prac-tices now differ greatly .

Exemption of governmental propert yused for business-type purposes createsinequalities in competition where tax -paying and exempt organizations arerivals.

Religious, Education, and Other Non-Profit. When possible change in the ex-emption of church property is dis-cussed, questions of the separation ofchurch and state arise . Even assumingno constitutional obstacles, relativelyfew Americans would probably favortaxing property used directly for re-ligious purposes .

However, some charges for specificgovernmental services to churches andother exempt organizations may be fa-vored without violating a basic princi -

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ple. It may be appropriate to bill forgarbage collection, water and sewe rservices, paving, policing for specia levents, and perhaps other local service sdirectly benefiting organizations whichare generally exempt. Yet would th eorganizations have ability to pay with -out hampering their basic functions?

Exempt organizations may own realestate for income-producing purposes —investment properties or operation swhich use buildings and machinery forbusiness-type activities . Denying ex-emption in such situations is common .The logic of imposing tax includes thefact that land in the community whichis used for one purpose is not availabl efor other uses — and the local govern-ment must have a tax base .

Not-for-profit hospitals, educationalinstitutions, libraries, art centers, an dother properties are generally exemp ton property used in the central pur-poses of the activity. The reasons forexemption differ somewhat amon gkinds of organizations .

In most cases the activities have pub-lic or quasi-public aspects — benefits togroups which may be large in relationto the whole public and get service sbelow costs or even free. Supporters ofexemption point out that in some casesgovernment would be called upon to dowhat the private organizations are do-ing. The non-governmental use of prop-erty serves purposes which are of ad -vantage to many people and make fora better community . To tax the institu-tions would add to operating cost an dcurtail their ability to serve the public .

Business-Type Property . Direct andindirect exemptions are granted increas-ingly for some property of businessesas a means of building the economicbase. The community may itself orthrough a special development au-

thority own land and buildings . Ex-emption is automatic . The funds use dfor financing may also be exempt fro mFederal income tax . The terms for leas-ing to private companies can pass on tothem the benefits of tax exemption .New producers may be welcome. Theywill, it is hoped, offer more and betterjobs and higher incomes for the com-munity . Property tax exemption maycontribute to the goal, although whatone community gains another may lose .Computations of benefit relative to cost sare complex for any one locality andeven more so for the country as a whole .The effects on competition among com -munities are subject to debate, but com -panies that pay the full tax must facesome disadvantages .

The granting of tax exemption toproperty used to reduce pollution bybusinesses has increased. The publicmay want to improve the environmen tor at least prevent it from getting worse .Government requests or compels busi-nesses to install new equipment to re-duce pollution. Is it not foolish in suchcases to add to the expenses of opera-tion by imposing a property tax? Busi-nesses are limited in their ability t obear costs . The public purpose, i twould seem, is advanced by avoidin gtax-created obstacles to the investmen tin the new equipment . Such equipmen tdoes not impose added service burdenson local government; nor do compa-nies get the benefits of more and betterpublic services . But the additions maycombine better pollution control fea-tures with others for expansion or fo rimproving efficiency . Then if machine sand equipment are generally to b etaxed, there may be difficulty in judg-ing the fraction which would be appro-priate for exemption .

Homestead and Personal-Type Ex-emptions. Exemption for "homesteads"

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is important in some states . Some dat efrom the depression of the 1930s . Partof the value of a house occupied by it sowner is exempt from the tax. Althoughfor the country as a whole the amount sare not large — 3.2 percent of gros sassessed value according to the 1972Census — in a few states the figure wa smuch larger, as shown for the six i nwhich the percentage removed from th ebase is greatest .

Mississippi 23.5Louisiana 20.0Florida 15.3Hawaii 14 .4Oklahoma 14.4Georgia 11.7

A few states also Jlow limited ex-emptions for veterans and for someothers, such as widows and the blind .Details differ greatly . In some cases theamounts are more than minor in rela-tion to tax . As a rule the exemption doe snot adjust for need on the part of thebeneficiary. Therefore, this means ofgranting relief is crude and can be ex -pensive in terms of cost to the treasury .More refined methods called "circui tbreakers" grant tax relief without th ebroad and relatively costly features ofthe homestead exemption; they are dis-cussed later.

Classification versus Uniformity

Many state constitutions include intheir ad valorem tax sections some typeof "uniformity rule." For example,Penr sylvania's Constitution provide s"all taxes shall be uniform upon thesame class of subjects within the terri-torial limits of the authority levying th etax . . . ." The basic standard is that thetax shall apply uniformly although som eexceptions are always found, such asthe exemption of property used forreligious purposes .

Several states, however, by explici tcon3titutional provision or statute pro -vide for "classification ." Properties areseparated into two or more classes an dsubject to different treatment . Certaingroupings of property may be assesse dat smaller percentages of full marketvalue than are others. For example,Minnesota assesses unmined iron ore at50 percent of market value, most resi-dential realty at 40 percent, most ma-chinery at 33;' percent, and so on . Toachieve the same result, a state ma yspecify rates which differ among classesof property . Oregon, for example, taxesforest lands west of the Cascade Moun-tain summit at 10 cents per acre, thoseto the east at 5 cents per acre .

The objectives differ — to provide in-centives or reduce disincentives, to fa-vor certain groups, or to simplify ad -ministration. The rc :ult is to vary thetax per dollar of value .

Railroad, Public Utility, Bank ,Insurance Company, and Som eOther Business Propert y

Space limits make it impossible to at-tempt to summarize here the man yspecial problems of applying ad va-lorem taxation to the property of rail -roads; telephone, electric, gas and othe rpublic utilities; banks, insurance com-panies, and certain other financial in-stitutions ; mines and growing timber ;and some other examples of tangibleproperty. Frequently, responsibility foradministration will be put upon a stat eagency rather than on the many lo-calities .

Valuation often presents exceptionaldifficulties, perhaps because of thehighly specialized nature of some struc-tures and equipment . Or in some casesthe physical assets may represent alarge investment of capital and labor ;

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