The Growth and Opportunity Party's (GOP) tax plan has recently received extensive media notice, with its potential ramifications being incessantly debated. Public attitude on the tax proposal is diverse with many individuals thinking that its fast passage has resulted to restricted participation and scrutiny. The bipartisan Congressional Budget Office has highlighted concerns about the large $5 trillion deficit it will impose on America's budget by 2027, implying that the law will only further impoverish Americans.
The tax plan is widely likely to pass, owing to increased political lobbying from private groups. The GOP leaders have attempted to justify the massive cuts for the wealthy by explaining that the middle class will also benefit from the tax deductions. Experts have disapproved this theory by revealing that the reduction will only go on for five years after which taxes for the poor will rise significantly. Among the most commonly talked about aspect of the GOP plan are the sizeable exemptions it gives to rich people. The estate section that currently charges levies for the transfer of property to heirs has been repealed and will not apply to people with assets worth up to $22 million (Slack & Bird, 2014).
Perin (2014) defines property tax as the taxation imposed by local governments on assets owned by a given individual as ways of collecting revenue. Perin (2014) adds that “this tax may be imposed on real estate or personal property. The tax is nearly always computed as the fair market value of the property times an assessment ratio times a tax rate, and is generally an obligation of the owner of the property. Values are determined by local officials, and may be disputed by property owners. For the taxing authority, one advantage of the property tax over the sales tax or income tax is that the revenue always equals the tax levy, unlike the other taxes. The property tax typically produces the required revenue for municipalities’ tax levies.” The payment of property tax is often mandatory. Usually, a fixed amount is decreed by authorities who self-mandate to collect the levy and is often independent of the individual’s income. As such, one must often pay the duty regardless of their income status. Unemployed individuals may find the law unfair as they are required to remit their contributions as well. Due to the localized nature of the imposition of the tax, receiving exemptions is often extremely difficult. Private individuals are not usually eligible for such breaks. Large firms may be awarded tax cuts as a means of attracting more investment into the regions.
Local governments are often given the liberty to set tax rates in their given jurisdictions. They are allowed to conduct independent valuations of the assets individuals possess and determine the levies owed to them. As property tax is one of the major revenue streams for the municipalities, its collection is often religious. In some regions, harsh and swift punishment is meted out to defaulters with huge fines, jail time, and the auctioning of the property being just but some of the measures taken. Local authorities may be bound to abuse this prerogative given that the responsibility of setting and overseeing the collection of the specific type of tax lies with them. The possibility prompted most states to establish a taxation cap that is not to be exceeded. In many instances, a single asset may be subject to taxation by multiple authorities. A property owner may be required to remit fees to various bodies for the same item. In such cases, the states issue a clearer directive on how the process occurs. The governments establish a local process that streamlines the revenue collection process, making it uniform among all its jurisdictions.
Most taxes are often computed by individuals on their own behalf. Usually, the Internal Revenue Service issues a given deadline by which all returns are filed and all taxes for a given financial period paid. However, the property tax is different. Owners are often presented with a bill outlining the charges a person’s property accrued. After the notice has been served, the tax becomes legally enforceable with authorities receiving an express mandate to pursue legal action on defaulters. The property becomes attached to any other liabilities the individual may have. A specific date within which the tax should be paid is announced with individuals being required to honor their obligations before the determined period. In many states, motor vehicles, private jets, yachts, and other types of non-fixed assets registered in the state are subject to the tax. Business properties are some of the items taxed by multiple state agencies.
Throughout the ages, very few changes have been made to property taxes. Authorities have endeavored to steady taxation rates as some of the property categories have not changed in decades. However, recent administrations have demonstrated an increased appetite for modifying the laws that govern the collection of revenue in their specific jurisdictions. It is speculated that the changes are driven by wealthy overloads who contribute heavily towards the leaders’ campaign kitties in exchange for favors once they are in office. The wealthy donors often influence the content of legislation and presidential executive orders to ensure that their assets are marginally taxed.
Under current tax legislation, a person may deduct levies paid to local and state governments in certain special conditions. In the proposed GOP bill, the deductions are capped at $10,000 for property taxes. Property owners whose bills exceed $10,000 and are not subject to any other alternative minimum taxes are especially advantaged as they will save massive amounts of money by clearing bills for the coming years before they begin. Property taxes account for nearly $539.8 billion collected by local governments all across America each year.
There are two major types of property taxes in the United States today. The classification depends on the mobility of the asset. They include real estate tax and personal property tax. Real estate tax is levied on items that cannot be moved. Examples of these include land and houses. Taxes charged on the properties are often dependent on their perceived value. Fixed assets in affluent regions are taxed more than those in less valuable locales. The size of the property is another parameter commonly used in the determination of the taxes. Larger estates may be subject to higher fees solely due to their sheer size. Personal property tax is charged on items with some extents of mobility. They include properties that can be displaced from one region to another. Example include planes, boats, and recreational vans among others.
Thesis Statement
Property taxes are a common fixture in the lives of most Americans. Whether it through the ownership of land, houses, motor vehicles, individuals have been acquainted with this obligation in one way or another. Property taxes are a major revenue collection stream for local authorities. As such, they are likely to be a regular component of the taxpayer’s obligations for the rest of the existence. However, in most literature, property tax is often lumped alongside other forms of taxation never mind their vast difference. It has undergone some of the most elaborate changes and is almost always bound to change with each election cycle. There are often comprehensive public debates assessing the whole construct of taxation of the various types of assets. However, despite the massive public and private interest in the subject, there is often a little amount of scholarly literature on the subject. This report will fill the gap in the literature.
Many economics pundits steer clear of the subject due to its unsophistication and simplicity. Its relative application also makes it especially difficult to study as there are many different dynamics affecting asset taxation at the local level. This article seeks to explicitly explore the concept of property tax taking care to reveal all matters that appertain to it. The paper will endeavor to disclose all hidden and known variables of the taxation of property in the United States. Additionally, a chronological account will be provided detailing the genesis of the practice. The recent massive changes that have occurred will also be sufficiently explored.
History of Property Tax
The 1700s to 1980s
The concept of taxation of property in the United States emanated from the colonial period. Personal ownership was a relatively new dynamic as inhabitants were at the height of their internal migration. Soon individuals would begin to identify prospective settling destinations near emerging towns, trading centers or mining areas. Upon noting this development, the state and local administrations in all but one of the 15 territories begun to tax land. Estates would be the easiest and perhaps the most reliable revenue collection avenues as owners had limited choice. They could not migrate further or decline to pay as their assets were often at the risk of possession by the municipals authorities. Land ownership was relatively a preserve of the wealthy. Poorer persons had to squat or pursue other less affluent living arrangements.
In some states, property taxes were levied indirectly. For instance, in Delaware, taxes were not charged directly on the assets, but rather, the returns accrued from them. Income from property would be computed and paid as ownership fees. However, in some states, all possessions a person had were liable for taxation. In these regions, tax-exempt items were free and based explicitly defined in law. In those early days, land would be taxed according to quality and perceived arability in some regions, according to quantity and size in others, and not at all in the rest. States had the prerogative of the taking up valuation responsibilities or delegating them. Counties and townships formed a critical component in the tax collection dynamic as they performed operations at the grassroots levels. They would host valuation delegations from the state’s headquarters or may have their own surveyors who would accomplish these tasks on behalf of the government. The states of Vermont and North Carolina charged levies based the expanse of a person’s land while Rhode Island and New York taxed owners based on their value. The procedures were widely varied with areas such as Connecticut charging fees based on how the land is used.
From 1796, America began its journey to becoming a single country, the single confederates gradually appreciated the major benefits a single state arrangement would commonly associate with one another in various capacities. The states, although deeply dived, shared a common concern, the fear of foreign attack. After a few disagreements between the states, a civil war ensued. The war would remind Americans the importance of cohesion and being a single unit. Taxation of all property, movable or fixed began to take a more uniform approach. The administrations charted a clear way forward for taxation at a federal level while allowing states to be in charge of collection at the very basic level. From that time one, property taxes were determined based on their value. Complex property dynamics came into play with lands that were considered barren becoming valuable overnight. Using the size of one’s estate ceased to be a gold standard of the computing property tax as the use of the land could change promptly. A highly valuable the establishment can be constructed on it and so can oil and other precious substances be found in it. The uniformity in state taxations would be a requirement for all confederates that sought join in the union. Their constitutions had to explicitly indicate their intention of not adopting property taxation laws that went against what was previously agreed.
1800s to 1900s
The end of the Civil War marked a great transformation in America’s property taxation paradigm. Intangible possessions such as corporate stocks began being far more important than fixed assets. Americans recognized the need of investing in and claiming partial ownership of corporate establishments. Some liquidated their properties to purchase the stocks. This development created a new challenge for authorities who were majorly unsure how to imposed taxation on that sort of property. Valuating stocks was difficult enough. Coupled with the reality that the value of company stakes changed every single moment, charging a fixed amount would be non-representative of responsible taxation practices. As such, alternative forms of taxation were developed for the invisible properties. The state or federal government would charge a fee on the income developed for trading in them or dividends accrued from them.
1900s
Property taxes remained the primary source of income for many states. It was immensely reliable, and its collection was made easier by the fact that property owners rarely defaulted. Enforcement could include acquisition and disposing off of the properties to recover lost revenue, making the taxation scheme all the more efficient. Taxpayers all across America took pride in remitting their returns to their state governments all across the country. It was a symbol of nationalism and great regard and respect for one’s country. However, all this would dramatically change in the years that followed. The Great Depression occurred leading to a significant devaluation of the currency, massive inflation, and general economic pandemonium. The people’s economic position suddenly plummeted with those who hitherto, had enjoyed relative financial stability finding themselves barely scraping by. Taxation policies were not revised in light of the massive change in American purchasing power leading to high delinquency rates and diminished revenue from property taxes (Feltenstein, Rider, Sjoquist & Winters, 2016). Enforcement strategies such as the auctioning off of assets would not be effective given that everyone affected uniformly. Upon recovery, states begun exploring better, more efficient ways of streamlining the taxation process.
Many jurisdictions revised their policies exempting certain properties from mandatory duty. Several economic classes were created including war veteran homes and properties which were exempt from any type of taxation. Additionally, “circuit breaker” provisions were established to determine the extents to which one can be levied. The policies were designed to shield property owners from adverse conditions should they not be in a position to pay. Increases in the value of taxes for residential areas was effectively capped.
In the 1950’s home ownership became an ideal for many individuals. The house with the “white picket fence” was the epitome of the American dream. People began to seriously explore the possibility of acquiring fixed residences. State governments reacted to the new development by adopting laws that supported this kind of growth. Having more people with homes would mean increased revenue. Taxpayer initiatives worked with the states to moderates property tax. Constitutions were amended to reflect newer policies with provisions such as the California Proposition 13 (1978) being adopted. The constitutional change would mandate a limit to the aggregate property tax (Ross, 2017). It would be set at a reasonable 1% of the full cash value of the property. Additionally, a limit to the increase in the real value of the property was imposed. The inflation factor was at 2% a year.
Post 1980s
The last half-century has seen unprecedented changes in the policies all across the country. Many regulations have been established to address and streamline the rapidly changing property ownership environment. Laws friendlier and supportive property acquisition and ownership have been established (Yinger, Bloom, & Boersch-Supan, 2016). Some of the key changes have addressed fairness in taxation or lack thereof, true property ownership versus allodial title, administration and redistribution of taxpayer funds, and progressivity or lack thereof. These areas have been determined to be the most relevant in light of the changes occurring in the industry.
Despite the new additions, much of the legislation on property tax has remained pretty much the same since colonial times. The reliance on local governments for enforcement is perhaps one of the most persistent aspects of it.
Sprawling
Despite the adaptations that property taxation has undergone to adapt it to the needs of the modern society, it is often faulted for not being comprehensive enough. The conspicuous absence of urban planning policies has led to change in the incentives presented to real estate developers which in turn, has extensively affected the patterns of land use. There have been great concerns of over the contribution of the policies to urban sprawling. As renowned taxation expert Elliot Brownlee explains, “the market value of undeveloped real estate reflects a property's current use as well as its development potential. As a city expands, relatively cheap and undeveloped lands (such as farms, ranches, private conservation parks, etc.) increase in value as neighboring areas are developed into retail, industrial, or residential units” (Argall, Hopcraft & Fischel, 2016). This raises the land value, which increases the property tax that must be paid on agricultural land, but does not increase the amount of revenue per land area available to the owner. This, along with a higher sale price, increases the incentive to rent or sell agricultural land to developers (Brownlee, 2016). The change in land use inspires the application of a new set of rules. The amounts paid by the owner in terms of taxes increase tremendously and must be consistent with the improvements made on the land. The greater the value of the developments, the higher the levies the amount of profit or loss developed from the venture notwithstanding. Property owners who make adjustments on their land for personal reasons and other non-commercial reasons are not exempt from taxation either. They must file amounts proportional to the changes they are making on their estates, despite the fact that they will not receive any financial benefit from it. This predicament has made developments less alluring than they should. Areas neighboring cities, major industrial hubs, and commercial centers are experiencing lower density developments which result in increased urban sprawl.
Authorities have noted the trend and actively work towards reducing the impact of property taxes on urban sprawl. They have made several attempts aimed at improving the appeal of the prospect of urban development for property owners. Some of the changes made include urban growth boundary, forcing higher density housing, development exemptions, conservation easements, current use valuation, and land value taxation. Land value taxation involves the division of a property’s value into its particular constituents. These include the land and improvement value (Allen, 2017). Lower taxes are charged on the improvement quotient while the land value is subjected to higher taxation. The arrangement not only ensures revenue neutrality but also encourages denser developments. Another common techniques utilized is the current use valuation. It involves the assessment of the value of the property based solely on its use. Different taxation approaches are adopted for the various usage categories with the most highly valued being most taxed. The approach effectively reduces city encroachment as it property owners feel liberated to make more compressive personal changes without attracting overly huge fees.
Conservation easements have been extensively utilized by local governments to curb the effect of property tax on urban sprawling. It involves enlisting a property owner’s consent in the prohibition of future developments (Eom, Bae & Kim, 2017). An individual approaches the local authorities and requests to put a restriction on their land barring any more developments henceforth. The process effectively removes the development potential factor of the property, a feature that often majorly defines the amount of taxation a person pays.
The limited adjustments made to property tax laws over have significantly impeded its ability to comprehensively address many duty-related concerns. The rapid development of urban dwellings as well as other facilities that were not available when the laws were created have made the application of the law exceedingly difficult. Property tax legislation often does not have the required amount of specificity when defining the types of assets they cover. The nature of the developments is vaguely described. However, many states are aware of this limitation and are working towards repealing it. Property classifications are being created and different types of taxations being levied. Favored classes such as private conservation parks, cemeteries, ranches, and firms are offered huge exemptions to ensure city sprawl into them. The properties may be charged as little as $ 1 per acre which is the smallest payable amount (Kilgore et al., 2016).
Some regions such as Portland, Oregon local authorities are often forced to accept higher density housing arrangements. The houses often have smaller lot sizes and developed close to each other. Such undertakings are often overseen by state agencies such as multi-county development control boards. Urban growth boundaries may also be set to determine limit urban sprawling. The areas, often referred to as greenbelts, are declared undevelopable by local authorities. City developers are often not allowed to acquire the property for construction purposes. The greenbelts may be gazetted as public land to eliminate the possibility of them ever being satisfying urbanization obligations.
The 1990s to Present
After 1980, there was reviewed vigor to repeal the outdated property laws. Democrats and Republicans alike were convinced that the laws no longer represented the bustling property ownership environment and that their continued application was generally detrimental to the industry at large. Local governments were convinced that the unprecedented growth that had occurred represented immense revenue potential, significantly higher than what they were accustomed to. Generally, the laws became a hindrance more than they were a regulatory framework. As such, it was imperative that they are changed. However, the problem was that property ownership and associated taxation was a fairly simplistic subject. Any new regulations made would only be marginally different from the original laws. Very few improvements could be made as the overall construct of the industry had not changed majorly. New alterations made mostly concerned the differentiation of asset classifications.
Private ownership categories would also be significantly changed as most people sought to be separated from the investments they co-owned or were linked to companies directly associated with them. However, in the late 20 and early 21st century, however, a new development began to emerge. Political interests took center stage on the creation of taxation legislation. Wealthy persons would directly affect the drafting of congressional bills by offering huge campaign donations to friendly candidates. In turn, they would receive massive favors in the form of tax breaks in their specific fields of interest. One of the most conspicuous illustrations of this is the tax breaks issued to golf course owners, estate heirs, property developers, and other special interest groups that directly contributed to both the Republican and Democrat congressional leadership in the previous midterm elections.
Conclusion
Property taxes have been a permanent fixture in the United States legislation for the better part of the country’s existence. Their application has varied tremendously over the centuries even as they strive to meet the rapidly changing ownership dynamics. As has been discussed in the paper, the initial days of property taxation in the United States comprised majorly of the charging of levies based on the sheer size and perceived value of the estates. Authorities would offer a valuation of the assets and provide a favorable market price valuation upon which the levies would be computed. In this period, no other items were charged. However, as the property ownership sophisticated, the need for more comprehensive laws emerged. Authorities recognized the need to tax movable assets as well as they were becoming increasingly valuable.
Automobiles, planes, and other possessions that could be physically displaced were charged based on their market value and depreciation rates. As time went by, a new type of property emerged. People began to exchange money for corporate stocks. The property was intangible, hence, could not be easily regulated. State governments, which are in charge of enfacing property tax laws, were at a loss on how to regulate the industry as it was extremely challenging to manage. Stock prices changed by the minute and depended on complex dynamics that were way beyond the scope of the local governments. As such, taxes on these types of property could only be charged on the returns they provided in terms of dividends and the amounts made upon their liquidation. The 20th and 21st century America has also seen its fair share of property tax changes with the Growth and Opportunity Party’s proposed bill being the latest development. The Republican-backed plan offers numerous changes to property tax laws include huge reprieves for persons with annual tax bills exceeding $10,000.
References
Allen, R. (2017). What explains the resolution of property tax delinquency prior to forfeiture? Evidence from Hennepin County, Minnesota. Journal of Urban Affairs, 39(4), 528-546.
Argall, D. G., Hopcraft, J., & Fischel, W. A. (2016). Commonwealth Forum: Should Pennsylvania Abolish the Property Tax for Schools? Commonwealth, 18(1).
Brownlee, W. E. (2016). Federal Taxation in America. Cambridge University Press.
Eom, T. H., Bae, H., & Kim, S. (2017). Moving Beyond the Influence of Neighbors on Policy Diffusion: Local Influences on Decisions to Conduct Property Tax Reassessment in New York. The American Review of Public Administration, 47(5), 599-614.
Feltenstein, A., Rider, M., Sjoquist, D. L., & Winters, D. L. S. J. V. (2016). The Impact of Interstate Mobility on the Effectiveness of Property Tax Reduction in Georgia.
Kilgore, M. A., Ellefson, P. V., Funk, T. J., & Frey, G. E. (2016). State Property Tax Programs in the United States: A Review and Evaluation of Incentives for Promoting Ecosystem Services from Private Forestland.
Perin, C. (2014). Everything in its place: Social order and land use in America. Princeton University Press.
Ross, R. (2017). The Impact of Property Tax Appeals on Vertical Equity in Cook County, IL.
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Yinger, J., Bloom, H. S., & Boersch-Supan, A. (2016). Property taxes and house values: The theory and estimation of intrajurisdictional property tax capitalization. Elsevier.
