Know Your Taxes – Ad Valorem

Ad valorem taxes, from the Latin, according to value, are ones that you must pay on the assessed value of real estate and other personal property.  These taxes are different from sales tax because sales tax is based on a purchase transaction, while ad valorem taxes are based on owning an asset.  Likewise, sales tax is usually charged once, while ad valorem taxes, such as property taxes, are charged over and over again.

This type of tax is vital to state and municipal governments as the majority of their income comes from property tax, which is a type of ad valorem tax.  To determine property tax, a property assessor places a value on one’s property; then, the tax assessor determines the amount of tax to be charged based on the assessed value.  The actual amount of property tax paid is often based on a percentage that takes into account the money that needs to be generated to help fund many public services including education, fire and police services, libraries and parks, to name a few.

In addition to property tax, another common ad valorem tax in the United States is motor vehicle tax, which is a tax on personal property.

Ad valorem tax can also be duty paid on the market value of goods imported to the United States.

While it may sometimes feel as if we are paying taxes in every aspect of life, ad valorem taxes are a vital source of income for local governments so that they can provide necessary, sometimes life saving, services to a community.  Without ad valorem taxes, we may see more communities where paying money to the fire department is optional; however, if you don’t pay, you don’t get service, even if the firefighters are right there with you watching your home burn down.

For more information, visit Investopedia.