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Property taxes, both real and personal, have long been the mainstream of
local government finances. Local governments currently receive the majority
of property tax revenues - over 96% - and the property tax is still the
largest source of local government tax revenue worldwide. The property tax
is ideally suited for local government use: it is levied on taxpayers with a
greater ability to pay (homeowners), its revenues directly benefit property
owners by providing streets, parks, and police and fire protection, etc., it
doesn't compete with tax bases preferred by higher levels of government
(sales and income), and it generates a predictable and stable revenue
stream. In spite of its advantages, however, the property tax remains an
unpopular tax, largely due to the difficulties of imposing uniform
assessments caused by assessment errors, infrequent reassessments or
discriminatory assessment requirements. Property tax revenues are the
primary revenue source for all types of local governments, including
counties, cities, school districts, and special taxing districts. Of these,
school districts typically rely most heavily on property tax revenues.
The property tax, unlike transactional taxes on real property (e.g. capital gains taxes, or transfer taxes) is a recurring tax that must be paid on an annual basis. Generally, the property tax is determined by multiplying the property's "assessed value" by the assessment ratio to determine taxable value, which is then multiplied by the property tax rate to determine tax liability. Exemptions from assessed value or tax relief programs targeted towards specific classes of homeowners, may then reduce the resulting tax liability. Among the states and even localities, however, there is a wide variation in assessed values, property tax rates, exemptions and tax relief programs.
Assessed Value - In most states, assessed value is the actual fair market value of the property. In some states, however, the assessed value is calculated from a different base. In Indiana, for example, the assessed value is the "true taxable" value, which is determined by the Board of Tax Commissioner Rules that approximate the replacement cost of the property, and take into account such factors as use, location, depreciation and obsolescence. In Delaware, assessed value is determined by reference to a base year that differs from county to county. For example, in New Castle County, current assessed value is expressed in terms of what the fair market value of the subject property or similar property was in the base year, 1983.
Assessment Ratio - Assessed value is then multiplied by an assessment ratio, which varies from 3.86% in Montana, to over 100% in some New England localities. In practice, depending on the efficiency of assessor's offices and the rate of appreciation of property values, the target ratio is rarely uniformly attained. In many states, assessment ratios also vary by property class, with different ratios for residential and commercial or industrial properties. Three states now have a statutory acquisition-value assessment method, which defines assessed value as the property's purchase price, and which limits property assessment increases to a specified percentage annually unless the property is sold. California instituted such a system under Proposition 13 in 1978.
Some states may also add an intermediate step before calculating tax liability. In Minnesota, for example, assessors are required to calculate a property's "tax capacity" before applying the tax rate. In 1994, tax capacity in Minnesota was defined as 1% of the first $72,000 of the assessed value and 2% of amounts over $73,000. Other states or localities may multiply assessed values by an "equalizer" or "multiplier" in an effort to more closely approximate the statutory assessment ratio, or may allow "rollbacks" in the assessment ratio to account for inflationary property values.
Tax Rate - Finally, the tax rate, which is set either annually or biannually according to state and local budget requirements, is applied against the taxable value to determine tax liability. Property tax rates are often expressed in millage rates or mills, which are equal to one-tenth of one cent, or $1 per $1,000 of assessed value. Thus, a property tax rate of 25 mills on property assessed at 100% of $100,000 would result in a tax of $2,500.
Because of the broad disparities in tax rates and assessment ratios, effective property tax rates are often used for comparative purpose. The effective property tax rate is the amount of tax paid expressed as a percentage of market value, and is calculated by multiplying the statutory tax rate by the assessment ratio. Because of the interplay between the statutory rate and assessment ratio, states may have widely disparate property tax rates, yet still impose comparable property tax burdens on homeowners. For example, the rate in Columbia, South Carolina, is $393.00 per $1,000 of value; the rate in King County, Washington is $15.53 per $1,000. However, because the assessment ratio is 100% in Washington but only 4% in South Carolina, the two jurisdictions have similar effective rates of slightly more than $15.50 per $1,000 of fair market value.
Tax Relief Programs
States generally offer two major types of property tax relief programs: 1) homestead exemptions or credits which are typically granted to homeowners or classes of homeowners regardless of income, and 2) "circuit breaker" programs, which provide property tax relief to selected low-income taxpayers. Homestead exemptions may be state or locally financed, and are generally allowed as reductions in assessed value before the property tax rate is applied. Homestead credits are typically subtracted directly from the property tax bill, are usually financed by the state, and can be designed to provide the same relief as exemptions. Circuit breakers are generally state-funded programs that provide relief (break the "circuit") if the property tax burden exceeds a preset percentage of income at various income levels. Relief is usually granted through either a state income tax credit, a direct payment (refund) to qualified taxpayers, or a state payment to the local government that lost revenue as a result of the program.
Other types of property tax relief are also used by states. These include a split-roll property tax system, where property is classified into distinct categories (residential, agricultural, industrial) and is taxed at different rates; deferral programs, where taxpayers (primarily the elderly and/or disabled) are allowed to defer tax payments until the owner dies or the property is sold; and current use assessments, where property is assessed at its current use (farming is the primary example), instead of its highest and best use, which is the norm.
Property Tax Reform
Recently, several states have begun to look elsewhere for funds and have proposed to eliminate the property tax. In July 1993, the Michigan legislature eliminated local school property taxes and recovered the funds by passing a Constitutional amendment 6 months later that increased sales and cigarette taxes as well as new statewide property and real estate conveyance taxes. In 1998, Vermont replaced local school district property taxes with a statewide tax on property or income, depending on the type of property and a household’s annual income.
The most recent attacks on the property tax have been seen in Minnesota, where Governor Jesse Ventura has led the effort to reform the property tax. Among the Governor’s proposals is to make the property tax smaller and more accountable. This would be accomplished by eliminating the general education levy and assuming state funding of 85% of education costs and imposing a statewide general fund levy on non-voting properties such as cabins and businesses.
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