The Property Tax–in Theory and Practice

The property tax is considered to be a good tax for local governments, mainly because of the connection between the types of services funded at the local level and the benefit to property values. Yet property tax revenues rarely account for more than 3 percent of Gross Domestic Product (GDP) in any country. This paper explains why the property tax is under-used by highlighting some of the problems with the tax, such as its unpopularity, its inelasticity, erosion of tax base, and poor administration. Reforming the property tax is difficult, however, because no matter how economically desirable the long-run outcome of reform may be, its transitional effects may be highly undesirable in political terms—there will inevitably be winners and losers. Even if the property tax is used more heavily, it will never be able to do the whole job, especially for local governments that are delivering more than property-related services.