A Comprehensive Analysis of US Real Estate Tax System

In the course of nearly two centuries of development in the United States, it has continuously changed and iterated, and has formed a relatively complete property tax system model. The evaluation technology and systematic tax incentives and other characteristics. The main purpose of taxation is to provide continuous and reliable fiscal revenue for state and local governments, and to provide stable financial support for urban infrastructure.

The main tax and the most important source of revenue for sub-state local governments. At present, the real estate tax in the United States has developed into the main tax type and the most important source of income for local governments below the state. ). The property tax expenditure is also mainly used to feed back local public services, including a series of contents such as fire protection, public security, road traffic, education, and environmental improvement.

The U.S. property tax rate and tax base change dynamically, and the collection system and payment system are perfect. The U.S. property tax rate is generally “according to needs”, and the overall state of the United States is in the range of 0.2–2.5%. The tax base is mainly based on the assessed value of real estate (multiplied by a certain taxation ratio). The assessment methods mainly include market comparison method, replacement cost method, income income method, etc., and different states adopt different methods.

Every year, the property tax collected in various regions of the United States will change according to the change of tax rate and tax base. When the housing price rises rapidly, the tax burden will also be adjusted dynamically. The perfect collection and management system and payment system guarantee the tax revenue in place, but the delinquency The situation is still unavoidable, and there are still more than $10 billion in property tax arrears every year.

There are tax incentives and tax restrictions, and the overall family tax burden is not high. After a long period of institutional changes, the current U.S. property tax system includes tax incentives for taxpayers and restrictive clauses that limit the tax burden rights of local governments. This is also the result of the mutual game between taxpayers and the government.

Preferential policies include tax exemptions, tax reductions, tax deferrals and tax credits for certain groups of people. At the same time, in order to limit the uncontrolled increase in tax burden, a series of tax rate restrictions, property tax revenue growth restrictions, and assessment value growth restrictions have also been introduced. The U.S. property tax system reduces the tax burden on taxpayers with different incomes through differentiated policies. Property tax accounts for about 3% of household income.

Analysis of US real estate tax system

The history of real estate tax in the United States-two rounds of institutional changes

As one of the international general taxes, property tax was first levied in the name of Family Rate (DomesticRate) in the “Poverty Relief” Act by the United Kingdom in 1601. As one of the countries with the most complete tax system in the world, the United States in 1787 Article 1, Section 2 of the Constitution grants the federal government the power to levy direct taxes, including property taxes, mainly to meet the needs of huge expenditures during the Revolutionary War. Illinois began to implement general property in 1818 A tax system that levies the same tax rate on all kinds of movable and immovable properties. After the states became independent in the mid-19th century, in order to overcome the prevailing financial crisis at that time, the state governments began to introduce this system and levied taxes on houses one after another.

The first round of the system -

At the beginning of the twentieth century, with the acceleration of urbanization in the United States, housing prices rose along with it, and the tax increase brought about by it brought huge pressure on public spending. Governments at all levels began to promote the first round of institutional changes in the US property tax. Tax relief policies for low-income families and the elderly, and circuit breakers for automatic relief after property taxes are higher than a certain tax amount have been established in various states one after another. At the same time, since most of the tax burden has been transferred from the state government to the local government, the main body of property tax collection and control has also shifted in the same way.

The second round of the system -

By the 1970s, as the economic development of the United States fell into the “stagflation” predicament, the rise in real estate prices brought about a sharp increase in the tax burden. States in the United States once again introduced new property tax policies characterized by tax restrictions on a large scale, opening the second round of institutional changes in property tax. The most influential during the period was California’s 13th Proposition in 1978, which included the adjustment of taxable house prices, the reduction and exemption of double taxation in the transaction link, and the restriction of tax growth, which provided a blueprint for other states to reconstruct the property tax system. .

After long-term operation and adjustment, the United States has formed a relatively complete property tax tax policy system. It focuses on the unified collection of property tax on real estate and its buildings. Budget formulation, perfect tax base evaluation mechanism, leading evaluation technology and systematic preferential tax policies. The main purpose of its tax collection is to provide continuous and reliable fiscal revenue for state and local governments, and to provide stable financial support for urban infrastructure.

US real estate market overview and household tax burden

The United States implements a diversified land ownership system, and the land attributes have various forms such as private ownership and government ownership. Among the 9.02 million square kilometers of land, private land mainly distributed in the east accounts for about 58%, the federal government and state and local governments account for about 40%, and the Indian-owned land accounts for 2% of the country’s land area.

The real estate market in the United States is characterized by a high degree of security and a high rate of ownership. The former benefited from the U.S. government’s setting of “home ownership” as a statutory goal, and as early as the 1998 “Housing Quality and Work Obligation Act” proposed “decent and affordable housing for all citizens” concept. According to the caliber of “overburdened housing” defined by the National Bureau of Statistics of the United States that annual housing expenses exceed 30% of annual income, nearly 39 million households in the United States were “overburdened” in 2015, accounting for 32%. At the same time, with the support of US policies on housing privatization, the housing ownership rate in US states continued to increase, from 63.5% in the mid-1980s to nearly 70% in 2005. However, due to the financial crisis and the bursting of the housing market bubble, the homeownership rate has declined in recent years.

According to the data from the American Community Survey conducted by the U.S. Census Bureau, the median household property tax expenditure in each state in the United States (based on annual estimates) rose from $1,838 in 2007 to $2,340 in 2016. The proportion of the number of digits gradually climbed from 3.66% to 3.96%. Among them, New York and surrounding New Jersey households pay the highest property taxes, with a median of more than $7,000, while Mississippi, Alabama and other states pay the lowest, less than $1,000.

Introduction to the subject and purpose of collection

The subject of collection is the local government, which is also its most important source of income

At present, the tax related to real estate holding in the United States is real estate tax, which is levied on land and houses, which is also the main component of property tax (according to the data of the 2015 statistical report of the US Bureau of Statistics, accounting for about 75% of property tax revenue) . Since the United States implements a tax-sharing system between the federal government, state governments, and local governments, each of the three levels of government has its own scope of tax power.

Therefore, the legislative power of taxation belongs to the federal and state governments, while the local government has no legislative power and can only collect taxes under the constraints of the tax laws formulated by the states. However, at the same time, the main body of property tax collection is the local government (county government, city government and school district), which is mainly used to provide public services such as fire protection, public security, road traffic, education, and environmental improvement.

Measured from the caliber of property tax, the proportion of property tax in each level of government varies. The state government’s tax revenue sources are relatively diverse and balanced, with sales tax, income tax, property tax and intergovernmental appropriations all accounting for a certain proportion. According to the 2015 state and local government financial statistics, property tax only accounts for 18% of the total. . For local governments such as counties, towns, school districts, special zones, etc., the proportion of property tax is relatively high, mainly between 50% and 75%, of which the special zone is as high as about 95%, and almost all rely on property tax. .

From the perspective of property tax alone, after more than two centuries of improvement, the property tax in the United States has developed into the main tax type and the most important source of income for local governments below the state, and it is also an important means of balancing local fiscal budgets. Data from the U.S. Bureau of Statistics shows that since 2002, property tax has continuously increased in the tax revenue of local governments, and currently accounts for about 70%-75% of local government tax revenue. After excluding federal and state transfer payments, it accounts for about 50% of total fiscal revenue.

It is mainly used for local government public expenditures and is also an important guarantee for the quality of the school districts in the region.

The US property tax is mainly used for the public expenditure of local governments, and has a relatively transparent property tax expenditure disclosure system. Each owner will also receive a government tax bill at the end of the year, which includes the property tax paid in the previous year. use.

Expenditure is usually divided into three main categories: first, school district education, second, public infrastructure and services such as fire protection, police, disabled assistance, elderly services, construction and maintenance of regional roads and bridges, and third, the daily expenditure of local governments. Among them, the school district education expenses for local public schools account for the vast majority of the property tax expenditure, accounting for about half of the total tax revenue. A typical example is Fort Lee, New Jersey. The property tax collected in fiscal year 2015 was about more than 63 million US dollars, of which nearly 32 million US dollars were collected on behalf of the school district, accounting for more than 50%.

Most cities and towns in the United States have school districts that are independent of the city and town governments. Their main responsibilities are to manage educational affairs in the school districts and provide educational services for young people in the school districts. At the same time, the school district’s funds also mainly come from property tax, which is mostly collected by the tax bureau of the city and town government. Data from the U.S. Census Bureau shows that between 2007 and 2008, only 8.1% of public education in the United States came from the federal government, the remaining 48.3% came from states, and 43.7% came from local governments. The main body is property tax. As a result, areas with higher property tax rates tend to provide better quality public education due to greater financial support.

Introduction to tax base, tax rate and payment method

The tax rate is determined by the method of “required payment”

The statutory rate of property tax in the United States is generally set in the local government budget legislative process. In terms of the form of tax rate, a relatively simple and easy-to-operate proportional tax rate is adopted, and the tax rate is determined by the method of “fixing the income as needed”. Specifically, each year the local government takes into account other income from non-property tax sources according to the fiscal budget requirements of the current year, and subtracts the two to obtain the total gap in the real estate tax that needs to be collected, and then divides it by the net real estate appraisal value to obtain the nominal tax rate. The derivation formula is:

Statutory tax rate = (budget expenditure — non-property tax income) ÷ real estate appraisal net value = (budget expenditure — non-property tax income) ÷ (total assessed value — exemption — relief — discount)

The core lies in the estimation of real estate value

- The tax base is a certain percentage of the assessed value

The tax base of the U.S. property tax is determined by a certain percentage of the assessed value of the property (the tax rate), mainly under the auspices of the state government. Due to the fact that the United States implements a thorough taxation system between the federal and state as mentioned above, property tax is the main local tax, and the valuation methods and taxation rates vary from state to state. For example, Pennsylvania’s relevant laws stipulate that the evaluation of home value adopts the comparable price method, and the statutory tax rate is only 32%, while California uses the replacement cost method to evaluate the home value, and the tax rate reaches 40%. The tax on a property can be expressed by the following formula:

Net real estate tax = tax base × statutory tax rate — tax preference = (assessed value × tax rate) × statutory tax rate — tax preference

Three valuation methods:

Market comparison method: also known as the comparable price method, that is, to evaluate by comparing the prices of similar properties that have been sold in the market recently. Specifically, it compares the prices of three or four houses sold nearby in the past 6 months, according to the size of the plot. , house area, house type, house age, house facilities, etc. This is the most commonly used valuation standard for imposing real estate taxes in the United States and is used by the vast majority of states. This method is more reasonable and effective for the value assessment of real estate for owner-occupiers, but it is less applicable to industrial and commercial properties.

Income Income Method: Estimating the value of a property by estimating the expected return of the property, this method is more effective for real estate that continuously generates income, such as apartments, shops, office buildings, parking lots and agricultural land. For example, the property tax base for Manhattan apartments in New York is estimated based on their rents, and houses with different rent levels have corresponding property taxes.

There are three types of revaluation cycles:

In the revaluation cycle of real estate value, each state also adopts different systems. The cycle ranges from 1 to 10 years. It is mainly divided into three categories: annual revaluation, partial revaluation and full-cycle revaluation:

Annual Revaluation: All real property is revalued annually based on changes in the market.

Full-cycle revaluation: After a real estate is appraised in a particular year, its valuation remains unchanged until the next prescribed appraisal year. However, if the real estate is newly built, damaged or changed during this period, it needs to be revalued, and the valuation cycle is usually between 2–10 years.

Partial Revaluation: Revaluation of a portion of the real estate is carried out each year at the same time as the full-cycle revaluation. For example, if the statutory revaluation cycle in an area is three years, one-third of the real estate in the area will be revalued every year, and in the third year, all real estate will be revalued.

Collection system and payment procedure

The collection and management of property tax in the United States is generally done jointly by state and local governments. In terms of specific function allocation, the state government is responsible for formulating unified state-wide evaluation standards and procedures, while local governments need to establish an evaluation committee and delineate tax evaluation areas, and then estimate the value of real estate within their jurisdiction, and finally report After the state government is unified, it will be transferred to the local taxation department. If there is a dispute over the appraised value, the local government is also responsible for the relevant mediation work.

The procedures for paying property tax in the United States are relatively simple. Each locality is levied on a quarterly, semi-annual or annual basis. Each homeowner will receive a tax notice sent by the local taxation department on a regular basis. way to complete the payment. Usually, the property appraisal office in areas where the collection is legally levied once a year will send the property tax form to the homeowner in December of that year, and the homeowner needs to pay the tax in full before the end of the first quarter of the following year.

Extension Rights and Penalties Clause

Taxpayers of U.S. property taxes have the right to defer filing, usually for a period of 30 days, according to documents on the IRS tax return page. If the tax is not paid on time, the tax agency will impose fines and an additional late fee, while the assessor can also impose a 10% penalty on the existing assessment. Many local governments will have the power to dispose of and sell homeowners’ property for tax deductions if taxes are owed for a long period of time (generally more than three years). According to the latest data from the National Tax Lien Association (NTLA), the size of the annual property tax arrears in the United States is around $12 billion.

US Real Estate Tax Benefits and Restrictions Treaties

Various tax incentives

The U.S. property tax system has experienced two large-scale institutional changes, and the corresponding preferential tax policies that benefit taxpayers and restrictive clauses restricting the tax burden of local governments are also the result of mutual games between taxpayers and the government. On the pages of the Internal Revenue Service’s (IRS) taxpayer’s rights and tax guide for low-income earners, we can see that the current U.S. property tax incentives are mainly divided into three categories:

1. Implement direct tax reduction and tax exemption. For example, residents are exempt from tax when they purchase the first non-operating property for self-use. At the same time, according to the exempt area and exemption amount stipulated by each state, the ordinary residence of residents will be exempted from tax. ;

2. The tax deferral clause for vulnerable groups. At the same time, when the value of the taxpayer’s property appreciates significantly, the taxpayer can first pay the tax based on the original value of the property, and the difference can be deferred;

3. The tax credit system is mainly aimed at low-income people. When the proportion of the property tax paid by the taxpayer to its personal income (or the personal tax paid) exceeds the legal provisions of the tax credit (each state has different proportions), then The government will return the excess to taxpayers on a pro-rata basis. Generally speaking, state governments provide more tax relief programs than local governments.

Systematic Restrictions

Although the main body of the US property tax collection is the local government, it also has the power to adjust the tax rate through the annual budget. However, in order to restrict the unrestrained increase of the tax burden by local governments, each state in the United States has formulated a series of restrictive treaties. In the key government report page released by the Lincoln Institute of Land Policy, it lists relatively complete U.S. property tax tax restrictions, which are mainly divided into tax rate restrictions, tax revenue and expenditure restrictions, assessed value growth restrictions, and full disclosure. Several categories are required.

Tax limit

In terms of specific operations, there are not only restrictions on the total tax rate, but also restrictions on tax rates by states, counties, cities, towns, school districts and other regions. Currently, more than two-thirds of states in the United States have formulated corresponding restrictions. For example, in Alabama, while the total state tax rate does not exceed 0.65%, it also stipulates that the county government’s property tax rate for general purposes does not exceed 0.5%, and the property tax rate for debt service purposes does not exceed 0.5%. The tax rate shall not exceed 0.25%, the property tax rate for purposes other than debt service shall not exceed 0.5%, and the tax rate of the school district shall not be lower than 1.0%.

Income and spending restrictions

About nine states in the U.S. have placed limits on the growth of property tax revenue or spending. Some of them limit the combined consideration of income and expenditure, and there are also restrictions on expenditure or income alone. In California, for example, state and local property tax revenues cannot grow more than changes in the cost of living and changes in population.

Assess growth constraints

About 19 states and territories in the U.S. have set limits on how much the assessed value of various types of properties can rise. At the same time, some states restrict the assessed value of different types of housing. For example, if the growth rate of the assessed value of self-occupied housing is lower than 3%, the assessed value of another type of agricultural real estate will also be restricted.

Full disclosure requirements

It is mainly divided into three categories, one is the disclosure of the tax increase relative to the previous year, the second is the disclosure of no tax increase or tax reduction relative to the previous year, and the third is the disclosure of the constant tax rate. There are currently 11 states in the United States that have such restrictions.

Originally published at https://www.tlw.com.