Property Tax Expenditures: Classified Property Tax Systems

Abstract

This paper focuses on the tax expenditures arising from property tax policies that apply different (non-zero) assessment ratios or tax rates to real property with the primary objective of redistributing the tax burden by taxing different classes of real property at different effective rates. In addition to reducing the property tax burden on favored classes of property, such classified property tax systems can result in reduced tax revenues. An overview of the various property tax classification systems used in the United States is provided along with tax expenditure estimates reported by several states. In a case study of local governments in Tennessee we provide estimates of two different measures of tax expenditures: The revenue lost to counties and municipalities resulting from a switch from a uniform to a classified property tax, and the shift in tax burden that results from a revenue-neutral switch from uniform to classified assessment.