Property Tax Calculation and State Rankings: What You Should Know

Property taxes are a revenue source for local governments, funding services like schools, roads, and public safety. They’re calculated based on a home’s assessed value and the local tax rate, expressed through the mill rate. This rate represents the region’s combined rate from various taxing authorities. Property tax rates vary widely across the country, with some states having much higher or lower effective rates than others.

How Property Taxation Works

Property taxes are a major source of income for city and county governments. Their boards, councils, and legislatures meet to decide the appropriate rates. Budget hearings commonly determine how money is allocated to various community services such as education, transportation, emergency, parks, recreation, and libraries.

The Tax Cuts and Jobs Act (TCJA) places a cap of $10,000 per year or $5,000 for those married and filing separately on the federal tax deduction for state and local taxes (SALT). This figure includes all real estate, income, and sales taxes on property. This provision is set to expire after 2025.

Understanding Property Value Assessment

Property taxes are calculated by multiplying the mill levy by the assessed value of the owner’s property. Different property types have various taxes assessed on the land and its structures. Vacant land will have a significantly lower assessed value and lower tax bill than an improved property. The land assessment might be higher if there is access to public services, such as sewer, water, and gas.

The assessed value first estimates the reasonable market value of a property, based upon prevailing local real estate market conditions. The assessor sends the assessment to the owner and follows it up with a tax bill. Tax assessments may be performed annually or every several years depending on the community where the property is located. The assessor determines market value using one or all of three methods that include:

• Sales evaluation: The assessor values the property using regional comparable sales. Criteria include location, the condition of the property, any improvements, and overall market conditions.
• Cost method: The assessor determines property value based on how much it would cost to replace it. Assessors consider the depreciation of the property and the costs of building materials and labor.
• Income method: This method is based on how much rental income the property can generate. The assessor considers maintenance and management costs, insurance, and taxes when using the income method.

How to Calculate Property Taxes

1. Identify the total assessed value of your property.
2. Determine the mill rate from combined local levies.
3. Apply the mill rate to the assessed value to compute taxes owed.
   

Comparing State Property Tax Rates

As property taxes vary by community and the value of property taxes fluctuates as housing prices fluctuate, among other factors, using the effective tax rate of each state can be a useful method of comparison.

The effective tax rate is the average residential property taxes paid as a percentage of home value. Below are the effective tax rates for each state as of 2022 (latest information) as provided by the Tax Foundation.

The Bottom Line

Property owners should understand how their property taxes are determined, including the role of the assessed value and the mill levy in calculating the amount owed. It’s also important to know when the billing cycle occurs and how to access tax information or pay bills online, as many cities now offer these services for convenience and transparency.