A local county government experiences an increase in spending needs. To help pay for these, it decides to permanently increase a nnual mill rates from $10 to $25 . Instead of making the increase all in one year, it decides to increase the rate from $10 to $15 in the firs t year, and then from $15 to $25 in the second year. T he mill rate is to remain at $25 e ach year thereafter. The Uys own a house in this county valued at $500,000 before the change in property tax policy. Assume interest rates are 10%.
Why does this capitalization occur? What factors lead to 100% capitalization versus lower rates of capitalization?