Nature of Property Tax Base

Nature of Property Tax Base

When reading about property tax, one can find it a bit difficult to grasp its nature due to the inherently dual nature of property valuation. A property or real estate generates financial benefit in two ways:

1. It generates rent for its owners; and
2. It increases its capital value over time.

The rent or revenue-generating capacity makes it suitable for a property to be taxed as income. That is, rent is an income; thus, the property should be subject to income tax. (For more information on income tax, visit Understanding Income Tax.)

Meanwhile, the ever-increasing capital value of a property makes it suitable to tax it as an asset or a piece of wealth. That is, the capital value represents asset value; thus, the property should be subject to wealth tax.

What should be the tax base for determining tax liability on a property for the purpose of property tax assessment? Should it be rent, or capital value? Property tax is neither income tax nor wealth tax.

Most governments around the world use capital value, e.g., market value or purchase value, for assessing value of property to determine property tax liability. For example, in most of the states of the US, county assessors use market value for determining property tax liability.

In some countries, notably Pakistan, property assessors use annual rental value for determining property tax liability.

Use of capital value as the property tax base makes property tax similar to wealth tax, and use of rental value as the property tax base makes property tax similar to Income Tax.

The point to ponder is:

Does property tax represent a case of double taxation?