Money Management and the Economy

Tuesday, June 15, 2010

Understanding Property Taxes

The AARP newsletter this month has a story about property taxes that seems to share many people's confusion about how the amount of property taxes they pay is determined. Once you understand the system, you realize there is no reason to expect your property tax bill to decline when property values decline or for it to increase when property values increase.

Many people think that local governments budget like they do. First you figure out how much money you have and then you decide how to spend it. But that isn't the case. In most jurisdictions, they start the process by deciding what to spend. Local elected officials decide what services they will provide and at what cost. This becomes the basis for making a levy of taxes against local property values.

The total local budget is divided by the total assessed value of taxable property. This establishes the tax rate. That rate is then applied to each property owner's value to determine their individual tax bill. What is important to understand from this is that the property owner's taxes are based on their share of the total assessed value for all taxable properties. When everyone's value goes up or down by the same percentage, property tax bills will not change. Its only when your assessed value changes more than your neighbors that it effects your tax bill.

This means that if an individual's property assessment is lowered, the taxes they save are transferred to other property owners. It also means that when new property is added to the tax roles, it will reduce everyone's property taxes. (Of course, that may be offset by an increase in the cost of services it requires.) And if an assessor undervalues one person's property or a class of properties, the result is higher taxes for everyone else.

It also means that in good times, when property values are increasing, the tax rate will go down even as your tax bill remains the same. And in bad times, like these, when property values are decreasing, your tax rate will go up, even as your tax bill remains the same. Which actually makes sense, since the value of real estate has little to do with the cost of government services or the ability of people to pay for them.

What it comes down to is this. The housing bubble didn't raise property taxes and its bursting isn't going to lower them. The cost of providing local services remains the same and so will your share of the bill. There isn't anyone else to pay for them.