In Canada, property taxes are typically based on "market value assessment". The assessment is arrived at by
- gathering information, for as many properties as possible, on:
- observable characteristics such as lot size, age and size of the home, number of bathrooms, proximity to parks and the city centre and
- selling prices
- estimating a relationship between the homes' characteristics and their selling prices, and then
- predicting what each individual property would sell for.
For example, after carrying out a statistical analysis of data on home sales, an assessor might arrive at an equation for determining the value of detached homes in Snowbank, Saskatchewan that looks something like this:
estimated market value=0.2*lot size (in sq ft)+0.5*house size (in sq ft)+15,000*number of bathrooms+25,000*number of bedrooms-5,000*distance to city centre in km+500*presence of granite countertops
Each home owner's property taxes are then calculated by multiplying the estimated value of their home (in thousands of dollars) by the mill rate - taxes owing per thousand dollars of assessed value.
There are three basic justifications for basing property taxes on market value assessment. First, people buy homes because they derive a flow of consumption services from those homes. A person's willingness to pay for a home is equal to the discounted present value of the consumption services that home yields. Therefore the market value of a home is the best possible estimate of the flow of consumption services it generates.
A second justification for market value assessment is that it is a way of taxing people's housing wealth, and the flow of implicit income from that wealth. This wealth and income would otherwise be untaxed in the Canadian tax system (except for capital gains on second homes and income from investment properties).
A final justification for market value assessment is that it is better than the alternatives, for examples, taxing homes on the basis of their purchase price, or on the number of windows that they have.
While the basic principle of market value assessment is uncontroversial, the implementation is not. For example, homes that are close to public transit typically have higher market values than less conveniently situated homes. Should that higher value be reflected in their property taxes? If the aim of property taxes is to tax the value of the home to the homeowner then, yes, people who live close to public transit should pay higher taxes. Yet if people pay higher taxes when they live near public transit, they will have less incentive to do so. Developers will have less incentive to build near transit infrastructure, making it harder to develop a well-functioning city.
Another example is the taxation of more subjective elements of property value. A recent paper by Nicole Fortin, Andrew Hill and Jeff Huang, using five years of data on the Greater Vancouver real estate market, found that:
in neighborhoods with a percentage of Chinese residents higher than the metropolitan average of 18%, houses with street numbers ending in four [considered unlucky in Chinese numerology] are sold at a 2.2% discount and houses with street numbers ending in eight [considered lucky] are sold at a 2.5% premium in comparison to houses with street numbers ending with any other digits.
In parts of the Lower Mainland, the market value of an 888 house number will be significantly higher than the value of a 444 house number. So should the owner of number 888 pay higher property taxes, and the owner of number 444 pay lower ones?
The purpose of property taxes is to tax the imputed income people receive from their homes, or the wealth that people hold in housing. If people are willing to pay a premium for house number 888, it must be because they receive consumption value from having a lucky house number. The consumption value of living, say, near a park is typically taxed in most market assessment systems. Is that any more arbitrary than taxing lucky numbers?
On the other hand, the residents of 2880 Kings Avenue might have bought their home 40 years ago, and have no use for numerology and other superstitions. Why should they have to pay higher taxes just because they happen to have a lucky number? What if they can't afford higher taxes?
While the "it's not of value to me" argument has some force, it applies equally well to unused bathtubs, bedrooms, garages, and so on. If the lucky number/extra bedroom/fancy bathroom is not of value to the owner, or he cannot afford the property taxes, he should sell the home. This would lead to a more efficient allocation of the housing stock.
I'm not seriously advocating giving special tax breaks to people living in houses numbered 13, or including feng shui in market value assessment functions. Yet the arguments against taxing lucky numbers illuminate serious tensions faced by our present system of market value assessment.
Note: I've edited this post in response to comments from a professional tax assessor posted below.