PROPERTY TAXATION - GENERAL PRINCIPLES
david hornby
The following are the necessary criteria for a good tax (after Musgrave and Musgrave):

the other objectives.

- Musgrave R A and Musgrave P (1980) Public finance in theory and practice, 3 ed, McGraw Hill, NY, 235.

This criteria was also supported by the Commonwealth's Draft White Paper (June 1983) Reform of the Australian Tax System, 14.

Current research shows the following conclusions about property taxes:

THE DISTRIBUTION OF THE TAX BURDEN SHOULD BE EQUITABLE

Compared with the income tax, property taxes are more equitable because:


The "modern" view is that the property tax is progressive because the incidence falls on the owner of the property rather than the tenant (Miezkowski, P M (December 1969) Tax incidence theory, Journal of Economic Literature 7,1103 1124). From an equity point if view, the land value system is favoured over an improved value system because greater equity is achieved through the shorter lead time between General Valuations and a more up to date and easily maintained fiscal cadastre.

THE TAX SHOULD MINIMIZE INTERFERENCE WITH ECONOMIC DECISIONS

Generally, the Australian property tax system does not unnecessarily interfere with economic decisions in otherwise efficient markets. However, there is evidence that the land tax system does force development, particularly in the CBD (Archer R (1973) Site value taxation in CBD redevelopment, Sydney, Urban Land Institute, Washington, Research Report 19). This is considered an advantage, as such "forcing" increases the land and building stock, increases employment and discourages speculation.

However, for residential land uses, the cost of the property tax is generally, only minor relative to other operating costs. Therefore, the tax does not interfere with economic decisions.

THE TAX SHOULD MINIMIZE INTERFERENCE WITH THE EQUITY OF THE SYSTEM

The use of allowances and the delay in updating values (particularly in an improved value system) undermines the equity of the property tax systems in Australia. The use of circuit breakers (for example, deferred rates following an increase in value caused by an upward change in zoning) can be justified on equity grounds when the taxpayer cannot afford to pay the increase. However, if the taxpayer is reasonably wealthy, inequity results and such allowances encourage speculation. Therefore, taxpayer should be means tested before such allowances are granted.

There should be no exemptions from a property tax including government departments as otherwise the tax ideal of universality is undermined, leading to inequities. For example, some local government areas with a large proportion of government departments or government owned land (eg educational sites) have a much lower tax base than otherwise comparable areas, with few government departments. Where tax exemptions are granted to non profit organizations such as charities, the Victorian system should be adopted whereby taxes owing or saved are paid back upon the sale of the land.

Property taxation in its basic form is a simple and progressive tax. However, when vested interests distort the system for their own ends, the tax becomes regressive and complex. This is particularly the case in America where the basic system has been gradually corrupted by the special allowances and valuation waivers for vested interest groups over time. An example of an unnecessary (and fiscal damaging) interference with the property tax system if California’s Proposition 13 which favours existing homeowners against new homeowners. Such distortions and complexities are much more difficult to implement under a land value tax system.

See proposition 13 and its official explanation attached.

THE TAX SHOULD FACILITATE THE USE OF FISCAL POLICY FOR STABILIZATION AND GROWTH OBJECTIVES

BUOYANCY

Based on available date, taxes on immovable property have been as buoyant as the income tax with the exception of taxes on immovable property against household income that is a little below unity. Further, taxes on immovable property have shown a high association with GDP and therefore, taxes on immovable property are generally buoyant taxes. Although high buoyancy is often promoted as an attribute there are arguments against it.

EXAMPLE

A non buoyant tax requires the taxing authority to publicly announce a new rate in the dollar more frequently whereas a buoyant tax system (such as land tax in an expanding economy) can surreptitiously increase tax revenue. Therefore, from the point of view of "accountability" a non buoyant tax is a better tax. This is shown by work done by Reece and Brown (Reece B F and Brown D (1994) Measuring the affordability and volatility of Australian State land taxation to monitor government performance, a paper delivered at the 4th Australasian R E Educators' Conference, Auckland) using affordability indexes derived from land taxes and commercial rents.

The index shows a steady erosion of affordability over the period 1984 to 1993 (table 1). It is submitted that this is caused by the land tax system being buoyant in the sense that the rate in the dollar is not publicly changed each to derive budgeted income. This is unlike local rates where the process is most public and commonly the local council announces a lower rate in the dollar to achieve the budgeted amount. The table below shows that because of this the variability of land taxes is much higher than that for municipal rates even though the same property value base is being used.

TABLE
COEFFICIENTS OF VARIATION OF TAXATION REVENUE (Real Terms)1972/73 – 1991/92

STATE LAND TAX STATE PAYROLL TAX MUNICIPAL TOTAL TAXATION REVENUE
NEW SOUTH WALES 0.40 0.18 0.10 0.26
VICTORIA 0.32 0.20 0.16 0.22
QUEENSLAND 0.82 0.18 0.22 0.32
SOUTH AUSTRALIA 0.22 0.16 0.11 0.21
WESTERN AUSTRALIA 0.38 0.23 0.24 0.34
TASMANIA 0.30 0.17 0.11 0.30
ALL STATES 0.39 0.18 0.16 0.27
(Reece and Brown, 1994, 9).






AN IMPORTANT PART OF THE BASKET OF TAXES

Property taxes are an important part of the "basket of taxes" in Australia and at state and local levels complement the federal government's large collection of revenue through the income tax. It is also an important tax as it is the only tax, which directly taxes wealth as measured by assets.

The proportion of total taxes is shown below:

PROPERTY TAX AS A PROPORTION OF TOTAL TAXES

payroll: 6.22%
income: 58.53%
goods and services: 20.72%
use of goods & services: 5.48
immovable property: 4.30%
other property: 4.93%

Source: ABS 5506

THE TAX SHOULD BE EASILY UNDERSTOOD

Land taxes are relatively simple compared to income taxes. The income tax has grown into an unwieldy and complex creature requiring experts for interpretation and preparation of the assessment. For example:

Australian Income Tax Regulation: "(b) a car is a predecessor of a second car is a third car is a predecessor of the second car and the first mentioned car is a predecessor of the third car (including a case where the first men­tioned car is a predecessor of the third car by another application or applica­tions of this paragraph)".

From Subsection 82KTJ[4] of the Australian Income Tax Assessment Act 1936, cited by Progress 2/95, p. 13



The current taxation regime is now even more complex with the introduction of the GST, a regressive tax with high compliance costs.

Simplicity of the tax system and assessment base is an important features of a good tax system. On this criteria the property tax system is a great deal better tax than the income tax and GST systems that currently apply in Australia. The importance of simplicity as an important attribute of a good tax system that has been underestimated by a number of commentators on taxation There are hidden costs in income tax and GST assessments as they are often paid for by the taxpayer as more and more employ professional tax consultants and accountants to prepare their tax return for them. As the Income Tax and GST laws become more complex, the cost of determination and compliance becomes even higher.

THE TAX SHOULD HAVE LOW ADMINISTRATION AND COMPLIANCE COSTS

The extensive use of sales evidence in Australian valuation practice reinforced by a number of court decisions has made the "proof component" for the property tax system extremely reliable. This has led to fair administration by valuation authorities and better understanding by the taxpayer. However, there is room for improvement particularly, allowing class and group actions and input into the system in the early stages of the preparation of the fiscal cadastre and valuation roll.

The last two necessary attributes undermine the use of the computer in mass valuations. A "human" must endorse a mass valuation if a dissatisfied taxpayer appeals against the assessment. The courts will not accept a computer valuation per se.

See property taxation
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