|Tax policy in the states|
How property tax works
In order to determine property tax liability, a property's value must first be determined. Two values are taken into consideration: the property's market value and the property's assessed value. Assessed value is used for tax purposes and is calculated by applying an assessment ratio to the market value. Some states use a property's market value in calculating its tax, in which case a 100 percent assessment ratio is used. Other states, such as New Mexico and Arkansas, "assess property at only a fraction of its actual value."
Once the assessed value of a property has been calculated, the amount may be further reduced by exemptions. A common exemption in many states is the "homestead exemption," which allows for a certain, predetermined amount to be subtracted from the assessed value of primary residences. The taxable value of a property is the assessed value minus any exemptions.
The property tax rate is applied to the property's taxable value. The property tax rate is also known as the millage rate and is often "the sum of several tax rates applied by several different jurisdictions." Any given property could be subject to city taxes, county taxes, school district taxes and more. Millage rates are rendered in "mills." A mill is one-tenth of 1 percent. For example, a 27 mill property tax rate would be equivalent to 2.7 percent. Property tax liability is determined by applying the millage rate to the taxable value of the property. Additional credits may be available to property owners, which can further reduce an owner's tax liability.
This scenario further illustrates the process. Assume that a property's market value is determined to be $100,000. An assessment ratio of 100 percent is applied to the market value, resulting in an assessed value of $100,000. Assuming that the property is a primary residence and the state in which it is located offers a homestead exemption of $20,000, the property's taxable value would be reduced to $80,000. A millage rate of 27 mills (or 2.7 percent) is applied to the taxable value, which results in a final property tax liability of $2,160.
Property taxes by state
The table below provides the mean amount of property taxes paid, as well as property tax as a mean percentage of home value, for the United States for 2012. According to the Tax Policy Center, which compiled the below data, New Jersey's mean property tax as a percentage of home value ranked highest in the nation in 2012 at 2.32 percent. By contrast, Hawaii ranked lowest in the nation at 0.27 percent. In terms of the mean amount paid in property tax, New Jersey again ranked the highest at $7,318 while Alabama ranked lowest at $631.
|Mean property taxes paid per state, 2012|
|State||Mean amount paid||Mean property tax as a percent of home value|
|District of Columbia||$2,635||0.57%|
|Source: Tax Policy Center, "Residential Property Taxes in the United States," November 18, 2013|
Collections per capita
The table below summarizes per capita state and local property tax collections for fiscal year 2011. According to the Tax Foundation, which compiled the data below, New Jersey's property tax collections per capita ranked highest in the nation at $2,893. Conversely, Alabama's collections per capita ranked lowest at $540.
|State and local property tax collections per capita, 2011|
|State||Collections per capita||Ranking|
|District of Columbia||$2,871||2|
|Source: Tax Foundation, "Facts and Figures 2014: How Does Your State Compare?" March 18, 2014|
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- Tax Policy Center, "State and Local Tax Policy: How do property taxes work?" updated May 9, 2013
- Institute on Taxation and Economic Policy, "How Property Taxes Work," August 2011
- Bankrate, "Property taxes explained," February 3, 2000
- Tax Policy Center, "Residential Property Taxes in the United States," November 18, 2013
- Investopedia, "Property Tax," accessed September 26, 2014
- Tax Foundation, "Facts and Figures 2014: How Does Your State Compare?" March 18, 2014