Property Tax in the USA

Tax

A tax is a financial charge that a government collects from persons

including individuals and corporations. Generally, governments impose taxes on persons, corporations, transactions, assets, etc. Income tax may be imposed on persons with a certain level of income, sales tax on commercial transactions at a given percentage of the sales value, etc.

The amount of tax is calculated from a base value; for example, income tax has income as its base. Where there is income above a certain level, there will be income tax. Similarly, value of sales is the base for sales tax, and number of items sold is the base for excise duty.

Property Tax

Property tax is a tax on property and is payable by the owner of the property. It is also known as millage tax and real estate tax. Property tax has value of property as its base, i.e., a government imposes property tax on the value of a property.

Property tax is an annual tax or annual charge on a property: the owner of a taxable property pays property tax every year.

Property Tax falls in the jurisdiction of local government

Normally, people think of government as a single entity. They do not have a good idea of its structure and the various levels of legislative tax powers. Generally, there are three levels of government:

     - Federal;

     - State; and

     - Local or county.

When it comes to taxation, each level of government has its own jurisdiction. For example, it is the power of the federal government to tax personal and corporate profits; the other two levels of government cannot tax these profits. Similarly, in most states and countries around the globe, property tax falls under the jurisdiction of local government.

Property Tax is an ad valorem tax

Property tax is an ad valorem tax. Let us explain what an ad valorem tax is. Taxes may be divided into two categories: ad valorem taxes and ad quantum taxes. Ad valorem taxes are calculated based on some value, e.g., value of sales revenues of a business, value of corporate profits, or value of a property. Examples of ad valorem taxes include sales tax and property tax. On the other hand, ad quantum taxes are calculated based on a quantity, such as number of items sold, weight of an item imported, or number of items exported. Excise and import duties are examples of ad quantum taxes.

Since property tax is an ad valorem tax, it is calculated as a percentage of the value of a property. Therefore, the process of determining property tax liability has two steps:

1.     Assessing the value of a property; and
2.     Taxing the assessed value of the property.

1. Assessing value of property

The value of a property used for calculating property tax may be:

    - Market value of the property;

    - Capital value of the property;

    - Purchase value of the property;

    - Rental value of the property, etc.

The amount of property tax payable depends on two values: the value of the property, and the rate of tax. In general, the property value is determined by an assessing officer and is not the market value. The market value of a property may fluctuate based on buying and selling trends in the real estate market, but its value for tax purposes may remain the same without regard to these fluctuations.

The assessed value will vary depending on factors including:

     - Nature of the property (commercial, residential, etc);

     - Size of the property;

     - Quality of construction or buildings; and

     - Location of the property.

Obviously, a commercial property has more value than a residential property. Common sense informs us that a big building with better construction has more value than a poorly constructed small house. Similarly, a property located in a commercial district has more value than a property located in a suburb.

In particular, the purchase value of a property may be used as the assessed value from year to year for calculating property tax. However, every year, a certain percentage – e.g. 1% – is added to the actual purchase value to reflect increase in value. In addition, when a property is substantially changed because of reconstruction, its value will be re-assessed.

2. Determining Property Tax

The property tax is calculated using the following formula:

Property Tax = Value of property x Property Tax Rate

The value of the property includes both the value of the land and that of any buildings on the land.

The rate of property tax may be expressed as a percentage or in mills. A mill is an abbreviation of the prefix “milli” indicating one thousandth of a value. It is equal to one tenth of 1%. Commonly, property tax is 25 mills, or 2.5% of the value of a property. For example, property tax on a property with a value of $200,000 and a tax rate of 25 mills will be calculated as follows:

Value of the property = $ 200,000

Property Tax Rate = 25 mills, or 2.5%

Property Tax   = Value of the property x Property Tax Rate

                                    = ($200,000) X (2.5%)

                                    = ($200,000 X 2.5/100)

                                    = ($200,000 X 25/1,000)

                                    = $5,000

This example has been kept very simple; in practice, the process of finding property tax may be more complicated. The step of valuing a property is usually the cause of the complication, as the calculation of property tax after the determination of a property's value is simple and straightforward in most cases.

Procedure for Assessing Property Tax

To determine the amount of property tax on a property, the property is assessed to get its value. The rate of tax is then applied to the assessed value to get the amount of tax on the property.

At county level in the USA, three offices are generally involved in the process of property tax assessment:

   

     - The county assessor;

     - The county auditor; and

     - The county tax collector.

However, the exact process and involvement of various offices varies from state to state.

Use of Property Tax

Property tax is one of the major sources of revenue for local governments, which use it to finance their operations. Typically, property taxes generate funds for counties, cities, schools, and tax districts.