What is an Ad Valorem Tax?

An ad valorem tax is a type of tax which is levied on property according to its value. Under an ad valorem tax, people who own certain types of property are required to pay periodic taxes which represent a percentage of the assessed value of the property. One of the most widespread forms of this tax is the property tax which people are required to pay on real estate.

The Latin phrase “ad valorem” means “according to value.” Depending on how regional laws concerning taxation are laid out, an ad valorem tax may be assessed when property is purchased, in the form of a sales tax or value added tax (VAT), or it may be levied later on a set basis, such as once a year or once a quarter. Ad valorem taxes can also be assessed on estates, imports, and in other circumstances where property of value changes hands.

The funds raised by such taxes are used to support the workings of government. Many provincial governments have an ad valorem tax code, and municipalities have their own ad valorem taxes, such as additional property taxes for people within city limits. The rate of taxation may be determined by the legislature, or by popular vote; the citizens of a town, for example, could vote for an extra quarter percent of sales tax to support a civic initiative. This is why sales taxes can vary significantly from city to city, as retailers must collect the state or provincial government's share, and the share demanded by the municipality.

In the case of an ad valorem tax assessed on real estate, cars, and other personal property, it is possible to appeal the assessed value in the event that people think it is unfair. As a general rule, property is not reassessed until it changes hands, which sometimes works to the advantage of the owner, as when the value of real estate increases but he or she pays property taxes based on the sales price of 10 years ago, but this can also be a problem when the value of property declines. Tax assessors do not charge a fee to re-evaluate a property.

Legislatures occasionally battle over ad valorem taxation. Some people feel that such taxation is a very efficient and effective way to quickly raise money to fund various government enterprises, while others argue that these types of taxes penalize people for buying or maintaining property of value. Conservatives tend to favor a reduction in ad valorem taxes, while liberals often push for a maintenance or increase, under the argument that these funds are needed to support the smooth operation of the government.