Making sense of property tax rates

Many of us that work with communities on a variety of community and economic development projects often come across discussion that revolves around property tax base and property tax rates and the ways that they influence our work. While some of us deal with it more directly, many of us are impacted by relying on property tax as a vehicle of financing local projects. However, the underlying concepts, issues and arguments as they relate to property tax base and tax rates rarely get the attention they deserve. Given that they are a major source of local government revenue and the huge role they play in economic development of a community and region, this short write up (blog) is an effort to explain in simple terms the mechanics of how property tax rate is determined and what factors play a role in influencing them (changes in the rate).

In its most simple form, the property tax rate is calculated using a formula that includes three major variables:

  1. The total expenditure that is required by a local government entity to provide services for a year.
  2. The total non-property tax revenue that is available to the local government
  3. The taxable base that can be used to levy property tax to generate the required revenue from property within a jurisdiction

The ‘budget’ which is a forecast of the amount of revenues that will be generated and the expenditures that are necessary to provide services is the starting point for any calculation of property tax rates. Based on the total amount necessary and the forecast of all the revenue sources (excluding property tax) for any given year, the local government estimated the amount that needs to be generated using the taxable base available in their jurisdiction using property tax. The difference between total proposed expenditures and non-property tax revenue is then divided by the total assessed valuation of the property that can be used for taxable purposes. That valuation estimates are provided by the county assessor who is entrusted with the task of assessing the major property types (residential, agricultural, commercial and industrial).

The property tax rate is usually represented as a dollar amount for every $1,000 dollar of assessed property value. For example, if the taxable value of a residential property is $1,00,000 and the property tax rate is $10.50 for every $1,000 dollar of assessed value, the amount that the property owner would have to pay is $1,050 for any given year.

Given the formula that is used to calculate the property tax rate, it is apparent that the rate can be higher if the non-property tax revenue share is low, the taxable base is low or it is a combination of both. Similarly, the rate can be lower is there is a higher taxable base, or there is a greater share of non-property tax revenue or a combination of both. For example, the City of Ames is able to keep its property tax rate low because the higher sales tax revenue the city receives (you can ascribe this to any number of factors) allows the city to offset some of the property tax revenue, thereby keeping the tax rate low.

An examination of municipalities that have higher property tax rates reveals that a low level of taxable base, usually on a per capita basis often times results in a higher tax rate. A governmental entity can also have a higher property tax rate if it has used that as an instrument to finance long term capital projects within their jurisdiction and is paying off debt.

The table below provides a comparison of property tax rates and the total taxable base for all cities in Iowa, during 2001-2013.  Data in its original form is from Iowa Department of Management.

Look for future postings to continue discussion of property tax rates and how they are impacted by as well as influence economic development efforts at the city and county levels.

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