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:
- Assessing the
value of a property; and
- 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.
