How do local governments fund their school districts, infrastructure projects, law enforcement, fire departments, and other services? Local governments generally charge relatively minor income, payroll, and sales taxes, if any at all. Instead, they rely heavily on property taxes as a source of revenue. Chances are that services in your local community, such as water and sewage utilities or the maintenance of parks and recreation areas, are largely funded through property taxes.
What are property taxes?
Property taxes are taxes on real estate and other forms of property. The rate of taxation is decided by municipal and state governments and varies widely across the US. For example, parts of New York and Illinois have property tax rates upwards of 3% while places such as Honolulu, Hawaii, and Montgomery, Alabama have rates lower than 0.4%.
How are they calculated?
The formula for calculating property taxes is simple: property tax = value of the property * tax rate. As mentioned before, the government determines the tax rate, whereas a tax assessor decides the value of a property. The assessor calculates the property’s fair market value, or the price that the property would sell for on the open market. This price is considered the value of the property and is used when calculating the property tax. If the owner of a property feels that their property was valued too high, they can file a tax appeal to lower the assessed value of the property. This allows them to lower the property tax they have to pay.
Good or Bad?
Property taxes typically generate more than 50% of total local government revenue (excluding federal/state aid). However, there are a few flaws with these taxes, primarily concerning their uncertainty and transparency. Property taxes can rise unexpectedly if a local government loses a source of revenue, for example, if a retail mall shuts down. The government is then forced to make up for the lost revenue by increasing the property tax rate. Additionally, most homeowners are not aware how their property tax bills are calculated or how to appeal them. This is largely due to a lack of widespread information about these taxes. In sum, property taxes are a stable and adequate source of revenue for local governments. However, it is important for governments at all levels to evaluate concerns about their unpredictability and transparency when making decisions regarding taxation.