Ad valorem taxes, a Latin phrase meaning “according to value,” are levied based on the assessed value of your real estate and other personal assets. This is different from a sales tax, which is tied to a particular transaction, while ad valorem taxes are linked to asset ownership. The key difference is that a sales tax is a one-time charge, whereas ad valorem taxes, like property taxes, recur.
These taxes are crucial to state and local governments as a significant portion of their revenue is derived from property taxes, a form of ad valorem tax. Property tax determination involves a multi-step process. A property assessor first appraises the value of your property. Then, the tax assessor calculates the tax based on this assessed value. The actual amount you pay as property tax typically depends on a rate that considers the funding required for various public services including education, police and fire departments, libraries, parks among others.
Beyond property tax, motor vehicle tax is another prevalent ad valorem tax in the US, levied on personal assets. There’s also an ad valorem duty, which applies to the market value of imported goods.
While a constant flow of taxes may seem overwhelming, ad valorem taxes are crucial for local governments to provide necessary and potentially lifesaving services to their communities. Without these taxes, we might witness more scenarios where paying for services like the fire department is optional. But a failure to pay could mean no help in an emergency, even if the firefighters are present at your burning property.
For more information, check out Investopedia.
