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Property Values and Property Taxes

Understanding how property taxes are set and collected will help you know how much bang you're getting for your tax dollar.

Property Values and Property Taxes

Understanding how property taxes are set and collected is the key to judging whether they're fair. Hopkins Patch attempts to explain property taxes in our first edition of Civics 101, a recurring column devoted to explaining different aspects of local government. If you have an idea for a topic you'd like to see covered, e-mail Hopkins Patch at james.warden@patch.com.

What is the relationship between property valuations and tax bills?

An indirect one. That's because unlike with an income tax or sales tax, a property's value doesn't alone dictate your your tax bill. Instead, the entity that sets your property tax first decides how much money it needs to raise, in total, by raising property taxes throughout its district. This is called the tax levy. At this point, property values are used to determine each property owner's share of that total. In other words, values don't dictate the size of the pie–they determine how that pie is divided.    

What does this mean for me?

First, it means your tax bill won't necessarily go down just because your property value goes down. To understand why, consider these four simple scenarios:

  • Imagine a city decides it needs to bring in $10,000 total by raising property taxes. If the four homes in its city limits are each valued at $100,000, each property owner would pay $2,500.
  • Now imagine that the next year every home's value falls to $75,000, but the city still sets the levy at $10,000. Each property owner would still have to pay $2,500.
  • On the other hand, if all home values remain equivalent and someone builds a fifth home worth the same amount, property taxes for each homeowner drops to $2,000. That's because more people are splitting the tab.
  • But if the city decides it needs to levy $12,500 instead, all five home will be back to paying $2,500.

Second, it means that new development doesn't necessarily send more property taxes to city coffers. For that to happen, the council must increase the levy. Development still has a couple of effects, though:

  • It spreads the tax burden among more property owners, which lowers individual tax bills and makes it more politically palatable to increase the levy.
  • It increases the limit that a taxing entity can levy under law, something called taxing capacity. This isn't usually a big deal for cities, which almost never tax at the maximum amount. But smaller taxing entities like housing and redevelopment authorities or economic development authorities hit that maximum much more easily.

So what does make my property bill change?

Property values: Residents whose home values rise faster than average (or, in the current environment, fall less than average) will bear a greater share of the property tax burden and see their taxes go up.

This also applies to industrial and commercial properties. They may retain their values, for instance, as home prices plummet — meaning they end up paying a greater share of the taxes than they once did, while homeowners pay a smaller share.

Changes in the number of property owners: As noted earlier, new development means more property owners who can chip in for the cost of government. Conversely, properties taken off the tax rolls will put more of the burden on those left behind.

The remaining two factors are based on the property tax levy, which is simply the government's budget minus all non-property tax revenue. Knowing that, you can probably figure out what they are on your own:

A growing budget will require the city to raise more money.

A shrinking pool of outside money will force local residents to make up for funding once provided by third parties like the state or county.

Why is my property tax rate so much bigger than other taxes?

Hopkins' proposed budget would give it a 55.673 percent property tax rate. But before you panic, it's important to understand that not all tax rates are the same.

With a sales tax, you pay a straightforward percentage of the item's actual cost. A $100 item taxed at 7 percent would have $7 in taxes.

Property tax rates are an altogether different animal.

  • The assessor first determines the property's value.
  • That value is then multiplied by a state-mandated class rate based on the type of property it is. A home less than $500,000, for example, would be multiplied by 1 percent. Apartments, commercial and industrial properties all have their own rates.
  • All of those values are added together to calculate the total tax capacity.
  • The city's levy is then divided by the tax capacity to calculate the tax rate.

Because property values are multiplied by class rates, the levy ends up being a much larger proportion of the tax capacity than it would be as a straight percentage.

So how can I figure out whether a government is spending too much?

Property tax bill: This is the crudest, least reliable measure because it is subject to so many factors, only one of which is government spending. To compound the problem, it only offers a look at one property whose tax bill can rise and fall differently than the government's budget. Still, it is the indicator residents feel most acutely and the source of most of the angst at truth in taxation meetings.

Property tax rate: This is somewhat more reliable because it looks at the community as a whole. Yet half of the equation depends on property values. As a result, rates can plummet in boom markets and soar in busts with little change in government spending.

Taxes on a home with a fixed price: This is a favorite measure among journalists because it allows people to easily envision how a levy affects their pocket books. They simply compare taxes on, say, a hypothetical $250,000 home one year to taxes on a $250,000 home the next year to determine whether taxes went up or down. The problem with this is that the number of $250,000 properties changes from year to year — especially during volatile markets.

To understand why, imagine four friends who agree to divvy up the bill whenever they eat out together. The first time they go out, each friend makes $50,000 so they split the $150 bill evenly — $37.50 each

Now imagine that the friends go out again. The total bill is the same as it was before. But since that first get-together, one person lost his job and another had his salary halved. The friend who makes $50,000 now has to pay $100 — even though the bill didn't increase and even though his salary didn't increase. He may make the same amount, but his salary is worth more compared to his friends'.

A better way to do this type of comparison is to look at the taxes on an average home from year to year. The average may be $250,000 one year and $240,000 the next, but the position in the pack will still be the same.

Tax levy: Like the tax rate, this covers the whole community. But also like the tax rate, government spending is only one part of the equation. In this case, the other part is outside revenues. Factors such as falling state aid or declining permit fees can force governments to lean more on property taxes.

Total budget: This reflects how much governments are spending, wherever the money happens to come from. Changes reflect real differences in what the government is buying and how much services cost. That makes it more comparable from year to year.

Of course, the ultimate measure of success is more subjective: Is the government performing the services you want at a price you're willing to pay? That's a question that each resident will have to answer on his or her own.

***

Words to remember

Class rate: A state-mandated percentage governments based on a property's use that is used to calculate the maximum taxable value of the property.

Property tax levy: The government's budget minus all non-property tax revenue.

Property tax rate: The amount that a government needs to raise from property taxes. Calculated by dividing the levy by tax capacity.

Tax capacity: The sum total of property values after adjusting for class rates.

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