Thursday, October 30, 2008

Property Tax Assessments

This week I got my notice from the government about how much they think my house is worth. They clearly didn’t spend much time on my house because my assessment went up by exactly the average amount in my area, 13%.

Fortunately, this doesn’t mean that my property taxes will go up by 13%. City governments don’t collect more taxes when property values rise and less when property values fall. What actually happens is the city decides on the total amount they will collect from homeowners, and then divides that amount among homeowners in proportion to assessed property values.

For example, if the city needs $1 billion from us, and the total value of all houses is $80 billion, then the tax rate is set at 1/80=1.25%. A house worth $320,000 would pay $4000 in property taxes. If property values had plummeted to a total of $50 billion, then the tax rate would have been set at 1/50=2%. The house that was worth $320,000 in good times is probably worth only $200,000 in bad times, but would still pay $4000 in property taxes (2% of $200,000).

With this type of system, what really matters to your property taxes is how much the value of your house rises compared to everyone else. Suppose that the city increases taxes by an average of 5% from last year to this year. My house’s assessed value went up by exactly the average amount, 13%. So, my tax increase will be 5%. If my assessment had gone up by 17%, then my taxes would have gone up by about 4% more than average, or about 9%.

One other wrinkle for my area is that new property values will be phased in over four years. This was done to reduce the shock for homeowners whose assessments changed dramatically. If no new assessments are done in the next four years, then I can look forward to paying exactly the average tax increase each year. If my assessment had gone up by 17% instead of the average 13%, then I could look forward to seeing my property taxes increase by about 1% more than the average for each of the next four years.

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