Progressive Property Taxes

The property tax is usually a progressive tax with limited distortionary impacts, though the details of its design and implementation, including the tax rate and assessment practices, ultimately determine its incidence and impact. In contrast to the United States, where local governments typically use a flat rate for property taxes, many Latin American cities use progressive tax rates that vary by property value and land use. In this study, we create and analyze a new database on property tax rates in the 200 largest municipalities in Mexico. Roughly half of them use progressive rates, with wide variation in their structure. We combine these new data with census data to answer three questions about the political economy of property tax design. First, what kinds of municipalities have more progressive property tax rates? Second, do municipalities with more progressive property tax rates have stronger local government capacity and cadaster administration capacity? Third, are more progressive property tax rates actually associated with more progressive property tax payments? We find wide variation in property tax structures. For properties valued at one million pesos, 13 of the 200 municipalities have a rate higher than 1 percent, 14 have a rate lower than 0.01 percent, and the median rate is 0.2 percent. Progressive rate structures also vary widely, and we find that municipalities with stronger local cadaster administrative capacity have more progressive rates. Effective property tax administration tends to be part of a comprehensive, multidimensional approach to property tax calculation and collection. These findings illustrate the importance of this new database, open new research questions, and yield insights for federal or state governments interested in supporting local governments to develop more equitable and effective property tax policy.