An ad valorem tax is a tax whose amount is based on the value of a transaction or property. It is proportional to the value of the underlying asset, unlike a specific tax, where the tax amount remains constant, irrespective of the underlying asset’s value. Ad valorem taxes are typically imposed at the time of a transaction, such as a sales tax or value-added tax, or annually, as in the case of a real or personal property tax. The Latin phrase "ad valorem" means "according to value".
Examples of ad valorem taxes include:
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Property taxes: These are the most common ad valorem taxes, levied on real estate and personal property. The real estate of property owners is periodically assessed by a public tax assessor, and the tax is calculated based on the determined value of the property.
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Import duty taxes: These are taxes on goods imported from abroad, and the amount of duty owed is often based on the value of the imported commodity.
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Stamp duty: This is a tax on certain transactions, such as the transfer of property or securities, and is imposed as an ad valorem tax in some countries.
Ad valorem taxes are a major source of revenues for state and municipal governments, especially in jurisdictions that do not employ a personal income tax.
