Thursday, September 5, 2013

Yes, property taxes on Guam are low, but not THAT low

I was firmly confident that I would not write any further posts until next week, then I read the Pacific Daily News (PDN) today. It turns out, they have whopping errors on three or four different facts in the editorial.  The PDN editorial reports that:

Guam's property tax rate is the lowest in the country -- it's just 0.005 percent of the value for land, and 0.01 percent of the value for buildings. In comparison, the lowest state property tax is Hawaii's, which is 0.40 percent.[1]

It turns out, most of these figures are not factual. The Office of Public Accountability's recent audit of Real Property Taxes reports the effective tax rate in different jurisdictions. According to the report Hawaii's effective tax rate is 0.28%, which is lower (albeit slightly) than Guam's effective tax rate of 0.29%. That puts Guam at the second lowest state or territory in terms of the effective property tax rate. Alabama, however, is the third lowest, with a 0.40% effective tax rate.[2]

Source: OPA. RPT Performance Audit Aug. 2013.

I have strong suspicions that the figure provided by the Office of Accountability for Guam is incorrect, which would make the PDN correct on one of these points (that Guam has the lowest property tax rate), by default, but I will return to this issue later.

The effective tax rates on Guam's Real Property Tax on land and improvements can be figured from a combination of two factors: the ratio of appraised value that is taxable and the tax rates on land and improvements, respectively. The ratio of appraised value is that is taxable is 100%,[3] so figuring the tax rates is simple and has just one step. The tax on land is at 7/80%,[3] which figures to 0.0875%. This is 175 times the rate the PDN cites. The tax on improvements is 7/20%,[3] which figures to 0.35%, which is 35 times the rate the PDN claims.

If you look at the tax assessment, the appraised value and the ratio of one to the other in the Office of Public Accountability's Table 11, titled RPT Assessments, Exemptions, Net Tax Due and Revenue Collection, Adjusted (to exclude duplicated property assessments), the result is the following table:

Assessment Year
Appraised Value
Tax Assessment
Tax as % of Appraised

I honestly cannot think how one could figure that Guam's effective tax rate is 0.28%, especially for 2011. Even if you take Tax Assessed as a percent of Assessed Value, the figure is 0.22%. If anyone would care to explain in the comments, I would be very interested. Another reason for skepticism about this is to consider that in order for this to be true, given the property tax rates for land and improvements, respectively, almost three-quarters of the value would have to be in improvements (about 73%), but the value of land (in detailed in the most recent debt abstract) accounts for just over half (about 53%) of the tax valuation.

That being said, the property tax is widely favored as an efficient tax for raising revenue. Nobel Prize-winning economist Milton Friedman once said of it that, "[T]he property tax is one of the least bad taxes, because it’s levied on something that cannot be produced — that part that is levied on the land". I have discussed exactly this point in a previous post on the subject. Regardless of my technical corrections in this post, I have considerable areas of agreement both with today's PDN editorial and the Office of Public Accountability's audit report.

UPDATE: A friend of mine pointed out the methodology that the Office of Public Accountability is stated in the report:

Guam’s effective real property tax rate, which is the average annual property tax calculated as a percentage of the median property value per the 2011 Assessment Tax Roll, was 0.29%.
 That is not mathematically valid. You cannot come up with an effective tax rate by looking at one set's property tax (namely, the average tax for all property taxpayers) and divide it by a different set's property values (namely, the value of the median taxpayer). Median and average are NOT the same.

[1] Pacific Daily News. Editorial. Increase: Boost property tax rate to pay for key services, spur land development. Hagatna, 5 Sep. 2013.
[3] The percent of appraised value that is used for tax purposes is found in Section 24102(f) and the tax rates are found in Section 24103.  Guam. Compiler of Laws. Guam Code Annotated, Title 11, Chapter 24.
[4] Guam. Guam Economic Development Authority. Government of Guam Long-Term Debt Abstract March 2013. Hagatna, Apr. 2013.

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