Property Tax

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What is Property Tax?

A property tax (or millage tax) is a levy on property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state, a county/region, or a municipality. Multiple jurisdictions may tax the same property.

There are three types of property: land, improvements to land (immovable man-made objects, such as buildings), and personal property (movable man-made objects). Real property (also called real estate or realty) means the combination of land and improvements. Under a property tax system, the state requires and performs an analysis of the monetary value of each property, and tax is assessed in proportion to that value.

Overview of Property Tax

Property tax is assessed against residential and commercial real estate according to each state's tax assessment policies. Property taxes are used to pay for needs within county communities such as law enforcement and firefighter salaries, improvements to existing schools, building of new schools, and road and infrastructure repairs.

Property tax is calculated by multiplying the assessed property value times the state tax rate. For example, if the state tax rate is 5-percent and appraised property value is $100,000, the annual tax rate would be $5,000.

Property taxes are paid on an annual basis, but most states allow homeowners to pay in two installments. Using the calculation above, property owners would pay $2500 per installment. Homeowners would need to set aside $416.66 per month to cover their tax bill. This amount is in addition to their monthly home loan payment.

The importance of property taxes differs greatly across levels of government.

• ∵In total, local governments - counties, cities, townships, school districts, and special districts - get 28 percent of their general revenue and 72 percent of their tax revenue from property taxes, a total of $347 billion in 2006.
• ∵Independent school districts rely most heavily on the property tax for own-source general revenue, receiving 79 percent from this source. They also receive intergovernmental aid, usually from the state.
• ∵Counties raise 39 percent of own-source general revenue from the property tax, while property tax revenues make up 34 percent of own-source general revenue for cities and townships.
• ∵States get only a small fraction of their tax revenue from property taxes, less than 2 percent in 2006. However, states that lack a sales tax or an income tax (or both) typically rely more heavily on property tax revenue: the levy′s share of total tax revenue exceeds 8 percent in Vermont, New Hampshire, Wyoming, Washington, Montana, Michigan, and Arkansas. Some states, including Michigan, Vermont, and New Hampshire, have recently enacted state property taxes as part of school finance reform.

Advantages of the Property tax are:

• ∵It is technically and administratively possible to introduce and/or maintain in almost any circumstances.
• ∵It is cheap to administer, and it is possible to aim for a cost yield ratio of 2 percent or less.
• ∵It is very difficult to avoid or evade, and collection success rates of 95 percent are readily achievable.
• ∵It is transparent.
• ∵The public understand the concept of market value (whether capital value or rental value) and therefore appreciate the basis of assessment.
• ∵In general there is a good correlation between assessed value and the ability to pay.
• ∵If designed correctly the tax can be marginally progressive.
• ∵The revenue is predictable and buoyant.
• ∵It is very well suited as a source of locally generated revenue for local governments.