INTRODUCTION
T
HERE ARE THREE BASIC VIEWS OF THE PROPERTY
tax: the “old” view, the “benefi t” view and
the “new” view. Under the “old” view the
property tax has two portions: a tax on land and a
tax on structures. The land tax falls on landown-
ers and the structure portion, assuming capital is
mobile, falls on consumers of fi nal goods, including
homeowners, renters, and consumers of products
(Wildasin 1986). Thus, the old view would produce
a regressive tax as most of the burden would fall
on consumers and low income people consume
a larger proportion of their income. The benefi ts
approach introduced by Hamilton (1975), which
relies on the Tibeout (1956) model, suggests the
property tax is a non-distorting payment for local
public goods. The benefi ts approach suggests that
the property tax is not actually a tax but acts like a
user fee. In the “new” view, originated by Miesz-
kowski (1972), the property tax has two parts: the
average nationwide rate, which falls on all owners
of capital and the local differential rate, which
has excise tax effects. Wildasin (1986) and Aaron
(1975) present an extensive discussion of the old
and new views.
The new view has some similarities to the corpo-
rate tax in that the corporate tax has a general tax on
capital but excise tax effects on corporate and non-
corporate goods. The average property tax portion
in the “new” view is progressive as higher income
individuals hold more capital. The incidence of the
excise portion is uncertain since it depends on the
relative incomes of consumers in the states with
tax rates above and below the national average
property tax rate. If the differentials in effective
property tax rates are small then the tax is essen-
tially a tax on capital for distributional purposes,
generally viewed as progressive.
This paper will use new data on effective tax
rates for all states to measure the average tax rate
and standard deviations for assessing incidence
WHO PAYS PROPERTY TAXES? A LOOK AT THE EXCISE TAX EFFECTS OF
PROPERTY TAXES ACROSS THE STATES
Jennifer Gravelle, U.S. Government Accountability Offi ce*
*These views do not necessarily represent those of the Government
Accountability Offi ce.
under the new view. These rates will also be
tested against per-capita income to determine to
the progressivity or regressivity of the excise tax
effects, assuming consumers in each state tend to
consume more of their own goods (certainly the
case for housing and services).
DATA
The data set consists of effective property tax
rates for 49 states and DC and variables that,
according to the theories outlined previously,
could explain variation in those rates across states
for tax year 2000.
1
The effective property tax
rates were determined by dividing state and local
property tax collections from the Census State and
Local Governments fi nancial data by estimates of
the 2000 market values of total property in each
state.
Market values of states’ property were con-
structed from assessed values collected from states’
assessments, auditing, or tax departments. Further
information was collected on the assessment ratios,
by type of property when available, and timing of
assessments. The assessed values were then infl ated
to market value using the assessment ratios and
indexed to the year 2000 according to the assess-
ment cycles. For further details on the assessment
ratios and cycles see Gravelle (2008). Due to the
complexities of Proposition 13 and its effect on
California assessed values, three alternative meth-
ods for estimating California market values are
used. The fi rst, termed ratio, uses California’s State
Board of Equalization estimated market values of
commercial and industrial property to obtain an
assessment ratio that is applied to total assessed
property. The second, termed res, uses the average
share of residential property across states that that
broke out such data to infl ate the estimated market
value of commercial and industrial property to total
property. The last, termed rule, relies on a “rule-of-
thumb” assessment ratio of 60% assessment ratio
suggested by offi cials in California’s State Board
of Equalization.
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ANNUAL CONFERENCE ON TAXATION
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INCIDENCE
Under the “new” view of property taxation,
property taxes represent an average tax on capital as
measured by the national average effective property
tax rate. Deviations from the average represent
excise taxes (or subsidies) on consumers. This view
is similar to concepts applied to other forms of tax,
such as the corporate tax, which is considered a
general tax on capital but imposes excise tax effects
on the consumption of corporate and noncorpo-
rate goods.
2
Because a tax on capital is generally
assumed to be born by high income holders of
capital, it is considered progressive. However, the
incidence of the excise portion of the property tax
depends on whether it is more often in the form
of a tax or a subsidy and to a lesser extent where
that tax or subsidy falls in relation of the general
incomes of the state. This section will explore the
value of the effective tax rates of property across the
50 states and DC and the implications deviations
from the national average have on the incidence of
the property tax as a whole.
The national, weighted average, effective prop-
erty tax rate on total property is 1.51%, 1.43%, and
1.36%, including California using the residential
share imputation, the commercial assessment ratio
imputation, and the 60% assessment rule imputa-
tion, respectively. The national effective property
tax rate on real property is higher by nature of the
exclusion of the zero effective tax rate personal
property inherent in the total property base values.
The national effective real tax rate is 1.65%, 1.57%,
and 1.49%, including California using the residen-
tial share imputation, the commercial assessment
ratio imputation, and the 60% assessment rule
imputation, respectively.
New Hampshire and New York have the highest
and second highest effective tax rate, respectively,
regardless of using real or total property. Hawaii
and Alabama have the lowest and second lowest
effective tax rates, respectively, regardless of using
real or total property. It is not the fi rst time Hawaii
has ranked low effective property tax rates. Lor-
relli (2001), who published residential property
tax rates in the largest city in each state for 1999,
found that Honolulu ranked lowest in effective
property tax rates compared to major cities in other
states. Table 1 provides some descriptive statistics
on states’ effective tax rates. For more details on
the states’ effective tax rates see Gravelle (2008).
Figures 1 and 2 show the distribution of total and
real effective tax rates using the ratio estimation
of California property values.
The remaining incidence analysis will focus
on the total effective tax rate since, while it does
have limitations in the exclusion of the zero rate
on personal property, incidence of property taxes
necessarily should consider total property. All the
analysis will present the three methods of adjusting
California values as there is no a priori belief about
the best method to impute California values.
In determining the incidence of the property tax
under the new view, it is important to remember
that the analysis begins with the progressive nature
of the tax of capital represented by the national
average property tax. The incidence of the excise
tax effects merely describes departures or enhance-
ments of progressivity. The portion of the effective
tax rates on property expressed as excise effects
account for 29%, 34%, and 39%, under the residen-
tial share, commercial/industrial assessment ratio,
and 60% assessment ration imputed values of Cali-
fornia, respectively. Half, in each case, is an excise
subsidy and half a tax. These shares represent the
property base weighted average of deviations for
the national average effective property tax rate.
That is, each share equals the absolute value of the
difference between the state’s effective tax rate and
the effective property tax rate for the entire nation
multiplied by the share of the national property
Table 1
Descriptive Statistics of State’s Effective Tax Rates on Total and Real Property
Mean (unweighted)
Standard Error
Median
Mode
Range
Minimum
Maximum
Total ETR
CA res
1.4522
0.0735
1.4800
1.9500
2.1800
0.5100
2.6900
Total ETR
CA ratio
1.4465
0.0743
1.4800
1.9500
2.1800
0.5100
2.6900
Total ETR
CA rule
1.4431
0.0749
1.4800
1.9500
2.1800
0.5100
2.6900
Real ETR
CA res
1.5969
0.0742
1.6800
1.9400
2.1800
0.5100
2.6900
Real ETR
CA ratio
1.5910
0.0751
1.6800
1.9400
2.1800
0.5100
2.6900
Real ETR
CA rule
1.5873
0.0759
1.6800
1.9400
2.1800
0.5100
2.6900
NATIONAL TAX ASSOCIATION PROCEEDINGS
96
for each state divided by the national effective
property tax rate. Therefore, these shares represent
the portion of the property tax that is in the form
of an excise subsidy or tax were the states to tax
based on the national average tax rate. While the
average excise effect is signifi cant it represents less
than half of the total incidence effect.
In general, based on the subsidy and tax excise
shares for poor and rich states the excise effect
of the property tax neither strongly increase nor
decrease the progressivity of the property tax as a
whole. Using the residential shares imputation for
California, 48.7% of the excise subsidy is in poor
states (states with per capita income lower than the
national average) and 35.1% of the excise tax went
to poor states. Under the commercial/industrial
assessment ratio imputation for California, 35.6%
of the excise subsidy is in poor states (states with
per capita income lower than the national average)
and 37.6% of the excise tax went to poor states. If
the “rule of thumb” assessment ratio of 60% was
used to impute values for California, 26.5% of the
excise subsidy is in poor states (states with per
capita income lower than the national average)
and 39.4% of the excise tax went to poor states.
Depending on the different imputed values for
California, 0.4% to 2.5% of the property tax is a
tax on poor states or 2% is a subsidy for poor states.
According to these results it appears that the excise
tax effects do not signifi cantly affect the incidence
of the property tax. Whether these effects increase
or decrease progessivity is uncertain; in fact the
Figure 1:
Distribution of Effective Tax Rates on Total Property (using ratio measure of CA property)
Figure 2:
Distribution of Effective Tax Rates on Real Property (using ratio measure of CA property)
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ANNUAL CONFERENCE ON TAXATION
97
results are clearly dependent on measuring property
values in California. Nonetheless, the effect seems
small. It seems clear that under the new view of
property tax incidence it is fair to conclude that
the property tax should be viewed simply as a tax
on capital income.
CONCLUSION AND IMPLICATIONS
Under the new view, which claims that the prop-
erty tax has two components—a tax on capital and
an excise tax effect, the tax on capital is considered
progressive and the incidence of the excise tax
effect unknown. Using the shares of the excise tax
afforded to the rich versus poor states the results
are inconclusive as to whether the excise effect
increase or decreases the progressivity of the prop-
erty tax, fl uctuating between generally subsidies in
poor states and subsidies in rich states depending
on estimated values of property in California. How-
ever, regardless of the uncertainty of the incidence
direction, the net effect of the property tax on the
poor barely reaches 2% of the tax as either a net
tax on poor states or net subsidy for poor states,
suggesting that the property tax can continue to be
viewed as a general tax on capital.
The new view also describes these differential
tax effects as arising from exogenous variations
in effective tax rates that therefore contribute to
the incidence of the property tax. Variations in the
effective property tax rates may be very closely
related to variations in the provision of services;
much more so than taxes such as the corporate
tax that have similar attributes to the new view of
property tax. While this paper does not address
the causes of variations in effective tax rates and
potential goods it may fund, it may be worth noting
how the net distributional effect of the property tax
when paired with benefi ts it provides could differ.
If higher property taxes are due to demands for
education, which Gravelle (2008) fi nds, than the
extra revenue would likely be used to provide more
public education. Since public education is more
heavily consumed by lower income individuals,
the net effect of regressive excise tax in states with
higher effective property tax rates and lower per
capita incomes could mitigated, taking into account
the benefi ts of the tax, by the increased provision
of goods to the lower income.
Notes
1
States vary in the defi nition of tax year; values are used
as close to 1/1/2000 as possible. Therefore, 1999 data
were used when assessment fell late in the year, for
example, October assessment deadlines.
2
Fullerton and Rogers (1993) assigned these excise
effects in their distributional analysis of the corporate
tax.
References
Gravelle, Jennifer. Empirical Essays on the Causes and
Consequences of Tax Policy: A Look at Families,
Labor, and Property. Ph.D. diss., The George Wash-
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Lorelli, Michael Fitzpatrick. State and Local Property
Taxes: Total Collections to Exceed $250 Billion in
2001 Special Report No. 106 Washington D.C.: Tax
Foundation, August 2001.
Mieszkowski, Peter. The Property Tax: An Excise Tax or
a Profi t Tax? Journal of Public Economics 1 (April
1972): 73-96
Tiebout, Charles M. A Pure Theory of Local Expendi-
tures. Journal of Political Economy 64 (October
1956): 416-424.
Wildasin, David E. Urban Public Finance, Langhorn PA:
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