Ad Valorem, which is Latin for “according to value“, refers to the taxes imposed on people usually by local or state municipalities. The two types are ad valorem property taxes and ad valorem tariff taxes.
Some U.S. states and local governments main income comes from an ad valorem tax. The first of these is a ad valorem property tax. This tax requires an appraise to value a household or land on a periodic basis. Once the value is determined, the owner is taxed accordingly. The other ad valorem example is a tariff on imports to the state or local government. These ad valorem tariffs are imposed upon imports into the state or local government. Often times it is a percentage of value of the goods being imported. Thus, if the value of the good goes up according to domestic goods then there is very little need to protect the domestic market. However, if the price goes down for international goods as compared to domestic goods then the tariff protects the domestic producers and provides income to the local government.
For example, Bob owns a household worth $300,000, and pays property taxes to the state government at 5% or $15,000. Recently, Bob’s house has an appraisal performed. Now, he has to pay $20,000 in ad valorem taxes. What is the new value of Bob’s land? See the following equation worked out:
Bob’s land = $400,000 = $20,000/.05