Property Tax Myths, Misconceptions, and Terms

Separating Property Tax Truth From Fiction

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More than a few property tax myths have been circulating out there for years. Part of the problem is that property taxes can be a complicated issue, full of mysterious-sounding terms, and this can make it even more difficult to separate fact from fiction. Here are a few myths you might have heard...along with the facts.

Myth #1: Assessors Determine Property Taxes

False. Assessors determine the market value of a property. This assessment is then multiplied by the tax rate to come up with the actual amount of property tax that appears on your property tax bill. 

If your home assesses for $300,000, and if your local property tax rate is 2 percent, you'll pay $6,000 a year in taxes.

Property tax rates are usually set local governments, such as city legislatures, county legislatures, or school districts.

Myth #2: Taxes Are High Because of Assessments

Yes and no. Assessments are only one part of the big picture. A high assessment can contribute to high property taxes, but the tax rate is what really determines how much tax will appear on your property tax bill. You'd pay only $4,500 in taxes annually on that $300,000 property if your tax rate dropped to 1.5 percent.

Now change the numbers around. Your home assesses at $200,000. Your tax rate is 3 percent. You're back up to $6,000 in property taxes again. You can have a low assessment, but you’re going to have a high property tax bill if it's subject to a high tax rate.

Your assessment is usually the only part of your property tax bill that you have any control over. Assessments can be somewhat subjective, so most localities have procedures in place that allow you to appeal if you feel that your assessment is too high or that it's not reflective of market value. 

Check with your local assessor’s office on how to file an appeal if you receive an assessment that seems to be way off.

Myth #3: Property Taxes Are High Due to State Budget Shortfalls

False. Property taxes are the number one source of revenue for local governments and school districts, not for the state. States sometimes get less than 2 percent of their tax revenues from property taxes, and many states receive zero percent. They allow localities and school districts to keep all the revenue instead. 

But states that lack a sales tax, an income tax, or both typically rely more heavily on property taxes than others. North Dakota, Delaware, New Mexico, Arkansas, Oklahoma, and Alabama all got less than 10 percent of their tax revenues from property taxes in 2015. Some states— including Michigan, Vermont, and New Hampshire—have enacted special state property tax levies to increase funding for public schools.

Overall, the average across all states as to how much revenue they receive from property taxes is about 17 percent.

Myth #4: Equalization Rates Can Correct Unfair Assessments

This myth is totally false. Equalization rates are not meant to correct individual assessments.

The equalization rate is the ratio of the total assessed value of properties in a community to those property’s true market values.

Equalization ratios are municipality-wide measurements that are meant to ensure that assessments within the entire district are close to market value. Equalization ratios can also be used to ensure that property taxes that are paid by multiple communities are divided in proportion to the total market value for each community. This is accomplished by requiring a certain assessment to market value ratios for all municipalities.

Myth #5: Tax Bills Are Good Indicators of Tax Increases

Not true. Again, a property tax bill results from two distinct factors: the assessment of the property’s value and the tax rate. You might not see a change in your property tax bill even if your tax rate increases if property values are falling. 

Likewise, tax rates could fall but if home values are increasing significantly, tax bills could increase. The amount of property taxes depends on both factors.

Myth #6: Assessment Caps Lower Property Taxes

Assessment caps require that assessments do not increase more than a set percentage each year. Capped properties that are increasing in value more rapidly than others could be under-assessed. This could happen because the cap does not allow these homes to be assessed at their true market value.

Let's say that there are custom homes in a high-end neighborhood that are increasing in value more rapidly than older homes in a less desirable part of town. The high-end homes are increasing in value at a rate of 25 percent each year. The older homes are increasing in value at just 10 percent per year. The cap limits assessment increases to 15 percent per year. 

This cap would therefore prevent the high-end homes from being assessed at their true market value—they'd fall 10 percent short. Meanwhile, the older homes would be assessed at full market value. 

This would leave the owners of the older homes holding the bag because the high-end homeowners are not paying their fair share. Of course, this is not always the case, but it is a possible flaw with the assessment caps systems.

Those Confusing Common Property Tax Terms

Property taxes come with a lot of jargon. Sifting through the various terms can have your head spinning. We've defined some of the more common property tax terms in plain English. 

  • Abatement: Forgiveness of a debt in whole or in part
  • Ad valorem tax: A tax based on value, such as a property tax
  • Arrears: This term is used when taxes paid in the current year represent the taxes owed for the previous year
  • Assessment/Appraisal: The process of determining the value of a property for property tax purposes
  • Circuit breaker: Any property tax relief that limits or reduces property taxes for certain individuals
  • Comparable sales method: Using sales of similar properties to estimate the market value of a property
  • Equalization rate: A ratio of total assessed value for properties in a community to those property’s true market values
  • Homestead deduction/exemption: An assessment reduction given to homeowners who use their homes as their primary residences
  • Tangible personal property: Property other than real estate that can be held and touched, such as a car or office furniture. Some states and cities tax the value of tangible personal property.

So there you have it. Your property tax bill should seem a little less mysterious now.