Other than mortgage interest, property taxes often are the biggest cost associated with home ownership, says Tara-Nicholle Nelson, San Francisco real estate broker and author of Trillion Dollar Women: Use Your Power to Make Buying & Remodeling Decisions. Property taxes are often complicated, consisting of ad valorem, or value-based, components; flat fee per unit direct assessments; and bonds to fund public works such as transport, school, parks and recreation. Additionally, special assessments may be levied on specific areas, particularly where new builds threaten to drain existing resources.
The Minnesota Center for Public Finance Research (CPFR), part of the Minnesota Taxpayers Association, produces a booklet, “Understanding Your Property Taxes,” which explains how property taxes are calculated.
Beginning with budgets. Although Minnesota, according to the CPFR, has “one of the more complicated property tax systems among the states,” it serves as an example of how budgets and tax rates are set across the other states. Each property falls within several jurisdictions, from county, city and township to school districts, watershed districts and so on. Each of these jurisdictions will, around nine months to a year in advance, set the budgets that are required for the following year to meet service levels mandated by federal government or demanded by the population.
The tax of last resort. Obviously, these budgets are not met in whole by property taxes. Nonproperty taxes and locally raised revenues may be subsidized by funds drawn from reserves and state aid to meet the budgets. “Importantly,” says the CPFR, “the property tax is the 'tax of last resort' — it pays for whatever local spending cannot be covered by these other local revenue sources.” When all other sources of revenue have been taken into account, the property tax revenue requirement, or levy, is established for each jurisdiction.
Distributing the burden. “All property taxpayers need to understand this very important point: Market value distributes the tax burden; it does not create the tax burden,” says the CPFR. The market value of each property is assessed annually, and the assessed value is used to apportion the share of the tax levy to be met by each property owner. As such, it is the relative value of the property compared to its neighbors, rather than any increase or decrease in value that will determine the tax paid.
So, for example, if home improvements result in a $10,000 increase in value to your home, but on average each of your neighbors’ homes increase in value by $20,000 in the same year, your share of the burden will be reduced. Similarly, new builds or demolitions, by altering the total value of property in the area, will also alter the proportionate burden of each real estate unit in the tax levy.
