The Property Tax, Land Use and Land Use Regulation

The Property Tax, Land Use and Land Use Regulation

Studies in Fiscal Federalism and State–local Finance series

Edited by Dick Netzer

Dick Netzer, a leading public finance economist specializing in state and local issues and urban government, brings together in this comprehensive volume essays by top scholars connecting the property tax with land use. They explore the idea that the property tax is used as a partial substitute for land use regulation and other policies designed to affect how land is utilized. Like many economists, the contributors see some type of property taxation as the more efficient means of helping to shape land use. Some of the essays analyze a conventional property tax, while others consider radically different systems of property taxation.

Chapter 3: Preferential assessment: impacts and alternatives

John E. Anderson

Subjects: economics and finance, public finance

Extract

John E. Anderson 1 INTRODUCTION Background State and local governments in the United States provide for reduced property taxation of agricultural land and open space. The primary mechanism by which this is accomplished is preferential assessment. By preferential assessment we mean any aspect of a property tax system that provides that a lower assessment ratio be applied to specific classes of properties. Most often states provide preferential assessment for agricultural property with a use value assessment methodology. Under this method of assessing property, the highest and best use of the property is not used as the assessed value for tax purposes. Rather, the value of the property in its current use is the value designated for tax purposes. To the extent that market value and use value diverge, with use value being lower than market value, a tax preference is provided to that property. The effective property tax rate is the nominal tax rate times the assessment ratio – the ratio of assessed value to market value. By providing a preferential assessment, lowering assessed value in relation to market value thereby lowering the assessment ratio, the effective property tax rate is reduced. Preferential assessment is pervasive, with nearly all of the states permitting use value assessment for agricultural land in particular. Valuing land in its agricultural use rather than in its highest and best use reduces the assessment ratio for properties where agriculture is not the highest and best use. The states of Wisconsin and Michigan are the...

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