Week 7: Local Governments, Property Taxes and Real EstateFederal and State governments transfer money, Local government provide direct services. Other countries?Why don’t local governments have income/sales taxes, and why don’t federal and state governments use property taxes?Central cities spend almost as much as wealthier suburbs. How? State equalization grants, and the pattern of location of commeDown Zoning (lower FAR F0 from F*): reduces the value of land but increases the value of the overall built property. Overall Mass Town zoning: maximum build-out Density versus actual current density (red regression line)Waltham Project: City has 16.1m square feet of office/Industrial which are taxed at 2x residential and contribute 60%(!) of toSome “Issues”Urban “Decay”: the whole Philadelphia StoryHow is it possible for higher income towns to “maintain” their higher income? Wealthier residents are willing to pay more for“Tax incidence”. State aid is cut: (1) taxes rise by T and rents paid go from R0 to R’ while landlord receives R’-T, or (2) STax Incidence: alternative outcomesVermont Property Taxes: the Howard Dean storyMIT OpenCourseWare http://ocw.mit.edu 11.433J / 15.021J Real Estate EconomicsFall 2008 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.MIT Center for Real EstateWeek 7: Local Governments, Property Taxes and Real Estate• How services, taxes and revenue sources vary by government in the U.S. • How services, taxes and revenue sources vary by town within MSA. • Property taxes and Property values.• Town Fiscal Incentives• Town stratification by income.MIT Center for Real EstateFederal and State governments transfer money, Local government provide direct services. Other countries?Government Expenditures,* 1990-1991Expenditure Federal State Local All GovernmentsDirect Transfer** Direct Transfer Direct Transfer Expenditure*** TransferDefense and international relations 366,112 — — — — — 366,112 —Health, welfare, and social insurance § 523,071 101,472 207,986 32,781 94,301 3,111 825,358 137,364Education 20,192 24,537 80,468 116,180 228,834 429 329,494 141,146Infrastructure and natural resources §§ 54,801 18,382 52,808 11,985 51,107 779 158,716 31,146Law enforcement and fire protection §§§ 8,111 736 22,592 2,154 51,332 103 82,035 2,993Sewage, solid waste management, and utilities 0 0 8,050 761 99,802 96 107,852 857٭Other 347,077 15,018 70,391 22,679 92,133 883 509,601 38,580Total 1,319,364 160,145 442,295 186,540 617,509 5,401 2,379,168 352,086•Millions of 1991 dollars (adapted from DiPasquale and Wheaton, 1996)•** Transfer columns represent intergovernmental transfers to all other levels of government. Total expenditure per category for each level of government is the sum of Direct and Transfer columns*** Excludes duplicative intergovernmental transactions.§ Includes social services and income maintenance, insurance trust expenditure, housing, and community development§ § Includes natural resources, parks, and recreation, highways, air transportation/airports, and other transportation§ § § Includes police protection, fire protection, and correction ٭ Includes other general expenditures such as space research and technology, postal service, and libraries; government administration; and interest on debts.*MIT Center for Real EstateWhy don’t local governments have income/sales taxes, and why don’t federal and state governments use property taxes?adapted from DiPasquale and Wheaton (1996)* In millions of 1991 dollars.** Includes individual income, and insurance trust revenue*** Includes sales, gross receipts and customs, and utility and liquor store revenue§ Includes charges and miscellaneous general revenue.§ § Civilian. Includes employees outside the United States.§§§Excludes receipts from intergovernmental transactions.Government Receipts,* 1990-1991Revenue Source Federal State Local All GovernmentsPersonal income and wages** 856,170 201,031 26,229 1,083,430Corporate income 98,086 20,357 1,886 120,329Excise*** 58,495 160,009 86,229 304,803Property 0 6,228 161,772 168,000Fees § 167,123 97,627 125,126 389,876Other taxes 17,574 31,163 9,039 57,776Receipts from intergovernmental transactions 3,234 143,534 201,833 348,601Total revenue 1,200,682 659,949 612,184 2,124,214Employment (thousands) 3,091 4,115 10,076 17,281MIT Center for Real EstateIt1989 Median HH incoHousehoem Boston Burlington Concord Needham Quincyme30,757 58,975 73,695 63,618 37,795lds 250,683 8,054 4,764 10,405 37,732Population 574,283 23,302 17,076 27,557 84,985Unemployment rate 5.50% 5.00% 2.70% 3.20% 5.80%ExpendituresEducation/pupil 6,679 5,501 7,179 6,053 5,836Education/HH 1,438 2,340 3,156 1,876 992General government/HH 280 244 339 214 136Police and fire/HH 836 773 641 544 590Other public safety/HH 224 36 41 62 39Public works/HH 284 577 300 416 313Health and welfare/HH 704 76 64 56 19Culture and recreation/HH 138 165 234 101 67Debt service/HH 328 233 256 370 205Other expenditures/HH 955 816 553 855 902Total expenditures 5,184 5,260 5,584 4,495 3,263RevenuesState aid/HH 1,846 707 554 360 942Local receipts/HH 1,425 993 434 954 461Total property tax levy/HH 2,071 3,768 4,535 3,167 1,749Other revenue/HH 45 362 349 314 415Total revenue/HH 5,389 5,830 5,872 4,795 3,567Residential tax rate 0.85% 0.88% 0.97% 1.00% 1.02%Percent of total levy 30.10% 36.00% 81.70% 73.00% 60.00%Commercial and industrial tax rate 2.39% 1.73% 1.08% 1.22% 2.29%Percent of total levy 64.30% 61.90% 16.50% 25.30% 37.40%Assessed residential value ($ billion) 20.60% 1.20% 1.80% 2.40% 3.90%Total assessed value ($ billion) 35.80% 2.40% 2.20% 3.10% 5.00%Residential taxes/HH 623.00 1,358 3,706 2,313 1,050Estimated total payments/HH 1,052 1,716 4,061 3,010 1,327Average single family property tax bill 1,377 1,577 3.535 2,647 1,608Central cities spend almost as much as wealthier suburbs. How? State equalization grants, and the pattern of location of commercial property.(adapted from Dipasquale and Wheaton, 1996)Selected Profiles of Massachusetts Cities, 1990MIT Center for Real Estate1). The Town Budget Identityt = (G - A ) P/(1-C)t = town residential effective tax rateG = total town expenditure/householdA = state aid received/household P = average market value of houses in townC = % of total property value that is commercial (assumes C does not influence G)Hence Tax rates depend on housing