Tax elasticity measures how readily tax revenues change with respect to how the nation's gross domestic product (GDP) changes. The value is similar to tax buoyancy, which measures actual revenue changes, but tax elasticity measures theoretical change in the absence of actual policy amendments. With specific taxes, the change depends on the quantity of an item sold. But with ad velorem taxes like property tax, it depends only on the taxed element's change in value.
Multiply the base year's property tax revenue by the percentage change in the value of property. For example, if a municipality takes in $25 million in tax revenue and property values rise 5 percent between one year and another, multiply $25 million by 1.05, giving $26.25 million.
Divide this value by the inflation rate between the two periods. For example, if the inflation rate is 0.09, divide $26.25 million by 1.09, giving $24.083 million.
Divide this deflated tax revenue by the original revenue. With this example, divide $24.083 million by $25 million, giving 0.963.
Subtract one from this value. With this example, this gives a drop of -0.037, or -3.7 percent between the two years.
Divide this percentage change by the percentage change in GDP. For example, if the GDP rises by 2 percent over the course of the year, divide -3.7 by 2, giving -1.85. This is the property tax elasticity. It has no units.
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