What is an ad valorem tax?

An ad valorem tax is defined as a tax that is based on the assessed value of a property. This means that the amount of tax owed is determined by the value of the property as assessed by the local government or tax authority. The term "ad valorem" is derived from Latin, meaning "according to value," which reflects the core principle of this type of tax.

In practice, this type of tax is commonly applied to real estate and is typically calculated as a percentage of the property's assessed worth. As property values change, the taxes will vary accordingly, which serves to equitably distribute the tax burden based on the relative value of each property.

In contrast, the other options presented do not accurately represent the nature of an ad valorem tax. Income taxes are based on earnings, sales taxes are imposed on the sale of goods and services, and a fixed tax rate on all properties does not take individual property values into account, which diverges from the fundamental concept of ad valorem taxation. Thus, the choice indicating that it is based on a property's assessed value is the correct characterization of an ad valorem tax.