Property taxes
Of all forms of government taxation, property taxes are more local than sales or income taxes. They are collected locally and the money typically supports schools and municipalities instead of going to state or local governments.
There are several kinds of property taxes, including personal property taxes on possessions, taxes on vacant land, farm taxes and business property taxes on land used for manufacturing and other commercial uses.
Home owner property taxes generate the most revenue in most jurisdictions and are the most widely used form of property taxation since they affect every home owner.
A typical residential property tax bill has separate categories for land and improvements, which include the house and other structures.
Property taxes are calculated based on what is called a mill rate. The rate often is expressed as a fixed amount of the home’s assessment. For example, if the tax rate is $10 per $1,000 assessed valuation, then the tax bill for the owner of a $200,000 home would be $2,000.
A home assessment is based on the estimated market value of the property or the replacement cost if it was destroyed. Recent home sales are used to determine market value.
If a home owner recently purchased a home for $200,000, the assessed value likely would be about the same assuming that the taxing body assesses at 100 percent of market value. If a home owner purchased a home 10 years ago for $100,000, the estimated value of that home today also could be $200,000 if similar homes have sold recently for that amount.
Tax assessors keep records on property improvements that are tracked by building permits. A major remodeling project can trigger a home reassessment and a higher tax bill.
The tax rate is calculated separately for each recipient of tax revenue. The amount of property taxes required by a taxing body to meet its budget obligations is called the levy. If a school district needs $2 million in property tax revenue to fund its annual budget and total value of taxable property in the district is $100 million, the district would need to collect $2 per $1,000 assessed valuation to meet its expenses.
The $2 rate is an average, however, and won’t be the same for all property owners because commercial or farm property, for example, may be taxed at different levels than residential property.
Some municipalities assess property annually while others may assess every few years or more due to the cost of hiring appraisers. That means that assessments sometimes lag behind the market. Some municipalities assess homes at 100 percent of market value while others assess at lower percentages.
Rates alone are not a good indicator of the tax burden in a community because assessments vary. During the housing boom, when home prices rose rapidly in some communities, governments were able to cut tax rates and collect more money because assessments went up.
Each taxing body calculates its rate separately and then the rates are combined to make up the total property tax bill. For example, rates imposed by these taxing bodies would add up to a total tax bill of $10 per $1,000 assessed valuation: School district, $5; city government, $3; county government, $1.50; transit tax, 50 cents.
Besides school districts and municipalities, property taxes can also be used to fund junior colleges, some state programs or local government initiatives.
Schools often are funded by a combination of state and local revenues so the state taxing structure affects local property taxes. Wisconsin, for example, has high property taxes, a state income tax and a sales tax rate of 5.5 percent. Tennessee has no state income tax, lower property taxes, but a sales tax rate of 9.75 percent.
The property tax burden on home owners also varies widely by community. A poorer community with low total property values would need to impose a higher tax rate than a wealthier community with high property values.
Most communities provide a mechanism often called a board of tax appeals for home owners to challenge their property assessments and tax bills. In order for a challenge to succeed, a home owner must present evidence that the assessment or bill is too high based on comparable homes.
Property taxes sometimes are considered more regressive than income taxes because they can place a greater burden on people with highly valued assets but low income like farmers and the elderly. States have tried to address this burden with tax credits aimed at these groups.