Determining Property Tax Rates
The practice of taxing land and land improvements, such as buildings, is one of the oldest forms of taxation in the U.S. Before income and sales taxes, local governments used property taxes to finance most of their activities. Property taxes remain a major source of revenue for local governments.
Tax Dollars at Work
Tax dollars help support the functions and services of taxing authorities like counties, cities, towns, hospitals, school districts, refuse collection departments, and special districts. These are legal entities of government with elected or appointed officers who serve a distinct geographic area.
Each tax jurisdiction sets its own property tax rate. A local taxing authority can use one of two methods to calculate the property tax rate:
- In the first method, the taxing authority estimates how much money it will need over a given time period. Then, it divides that figure by the value of all property within its jurisdiction. The result is the tax rate. This rate is sometimes expressed using percentages and sometimes as a dollar amount (i.e. $1 per $100 of property value). Example: A county government estimates it needs $1 million per year to operate and provide for services to residents. The value of all property in the county is estimated to be $100 million. It therefore sets the tax rate at 1% and you will pay 1% of the value of your property as property tax.
- The second involves changing the amount spent rather than the tax rate. Using this method, the taxing authority estimates the amount of taxes available from all property tax levied at a specific rate. The taxing authority will then either increase or decrease its budget based on increases or decreases in the total value of the property's taxable or assessed value. Example: A county collects a 1% property tax. It estimates that doing so will lead to $1 million in revenue for the county based on the value of all property within its jurisdiction. The county therefore adjusts its budget to $1 million.
In some jurisdictions, there may also be supplemental assessments based
on voter-approved debt rates, parcel taxes, and special tax-assessment districts, like Mello–Roos districts in California. All of these additions would be rolled into the overall property tax bill.
Property Tax Limitations
State constitutions or statutes commonly impose rate increase limitations. Many states set a maximum rate for each class of government (school, city, or county).
Because property can be located in overlapping tax districts (e.g. schools and towns), total tax rates can vary from one neighborhood to another. This can also result in more than one local taxing authority calculating tax rates for a property. Many jurisdictions aggregate these rates into a single tax levy called a "consolidated," "overall," or "composite" levy.
For more information on property taxes, visit FindLaw's Tax Center.
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