Question 1: Property Tax Calculation

Below is an example of how property tax levies and tax rates are determined, and how that then is translated into an individual property owners tax bill.

1. Determine the amount of the total tax levy needed

• the jurisdiction calculates the amount of revenue needed from property taxes
• this will be the total amount of budgeted expenditures, minus the amount of revenues from non-property tax sources that are expected to be collected
• this assumes that the government is not operating under a tax limitation measure, and has the ability to raise property taxes from year to year. With property tax limits, the jurisdictions often have to work backwards, first figuring out how much they can legally tax, then determining the total tax levy from that.
• This also assumes that the elected officials have the political will to raise property tax rates if the costs of government services increase. Often, due to the unpopularity of the property tax, officials try hard to avoid raising property tax rates from one year to the next.
• In reality, the government will levy a larger amount of taxes than it needs, because some of the amount levied will never be collected. For our purposes here, we are assuming that the entire levy will be collected.
• In the example below, the government needs to raise $80,000 in property tax revenue. They expect to need $95,000 in total revenues to pay their expenses, but expect to collect $15,000 in revenue from other sources, leaving an $80,000 balance.
• This is based on valuations made by assessors. Assessment practices vary widely across the country. For example, in Nebraska, elected county assessors are responsible for property valuation for all property within the county; in New York, cities and towns may have their own appointed or elected assessors. Some states are moving towards centralized statewide assessors.
• The appraised property value for residential property should be close to the market value (what the property could be sold for). However, the assessed value may be different from the appraised (market) value. In some states, property may only be assessed at a fraction of market value (e.g., cities in a given state could be restricted to assessing property at 25% of appraised/market value).
• Some property is exempt from property taxes (e.g., government facilities, some nonprofit organizations, elderly exemptions, etc.) These exemptions must be subtracted from the total assessed value to determine the taxable valuation.
• In the example below, the total taxable assessed value is $1,750,000, and there is no difference between assessed and appraised value.
• The basic formula for determining revenue yield is: Yield = Base * Rate. The amount that will be collected by the government is equal to the tax base multiplied by the tax rate.
• In order to calculate the tax rate, then, we need to divide the Yield (in this case, the total amount of the property tax levy required) by the Base (the tax base is the total amount of taxable assessed property value).
• The property tax rate is usually expressed in terms of the rate per hundred dollars of assessed value, or the rate per thousand dollars of assessed value. This may also be referred to as the mill rate. One mill is $1 per $1,000 of assessed value.
• In the example below, the tax rate for this government next year will be $4.57 per hundred dollars of assessed valuation (or $45.70 per thousand dollars of assessed valuation, or 45.7 mills).
• Each property owner will pay a tax bill based on the amount of taxable assessed value of their property.
• Yield = Base * Rate, so the tax bill for an individual will be the total taxable assessed value of the property multiplied by the tax rate
• In the example below, the taxable assessed value of the property is $8,000, so the total bill for this property will be $365.60

1. Determine the total amount of taxable property (assessed valuation)

1. Calculate the Tax Rate

1. Calculate the tax bill for an individual property owner

	Example	Exercise
City Tax Levy Requirement (the amount they need to raise in property tax):
Total estimated expenditures	$95,000
Other revenues (non-property tax sources)	15,000
Property tax levy	$80,000
Assessed Valuation:
Total assessed property value	$2,000,000
Property exemptions (non-taxable property)	250,000
Net Taxable Assessed Value	$1,750,000
Tax Rate (per hundred dollars of assessed value):
Rate = Yield / Base = Tax Levy/ (Taxable Assessed Value / 100)	$80,000/($1,750,000/100) = $4.57 per hundred
Joe Smiths Property Tax Bill:
Taxable Assessed Value of Joes House	$8,000
Tax Bill: Yield = Base * Rate = (Taxable Assessed Value/100) * Tax Rate	($8,000/100) * $4.57 = $365.60

Exercise:

Knightstown has a property tax base with an appraised value consisting of $142,000,000 of taxable real property and $78,000,000 of taxable personal property. The assessment ratio is 50 percent. Exemptions for the elderly reduce assessed value by $3,000,000. The city has a planned budget of $3,500,000 and expects to receive $750,000 in non-property tax revenue. Calculate the statutory property tax rate.

The Smith family lives in Knightstown. Their property has an appraised value of $42,000. What is their city property tax bill?

Do the exercise in the above table