Property Tax

What It Means

A property tax is a fee charged by the government on the value of privately owned property such as land, houses and other buildings, and machinery. A property tax is usually charged as a percentage of the value of the property. The use of the property also determines how much tax is owed. For example, if a building is used for residential purposes (that is, for people to live in), it will be taxed at a different rate than if it is used for commercial (business) purposes. Property owners must pay taxes whether or not they actually use the property and regardless of whether the property generates income for them (as a privately owned business such as a store might).

People usually pay property taxes to the city, county, school district, or local government where they live. In the United States the state governments make up the guidelines under which local governments can impose property taxes, and the 50 states have different rules about what property is required to be taxed.

Local governments use the funds they gather from property taxes to create budgets for roads, public schools, public libraries, snow removal, policing, fire protection, hospitals, and other public services provided at the local level. In the United States property taxes are the core source of funding for education. Approximately 50 percent of revenue for public schools comes from property taxes.

Some property taxes are paid annually, and some are paid in two, three, and four installments throughout the year. The due date for a property tax depends on the location in which it is levied, or imposed.

When Did It Begin

The first property taxes were based on the amount of property (usually defined by the amount of land) that an individual owned. Centuries ago human societies were largely agrarian, meaning that property ownership and wealth were tied to land, particularly land used for farming. Later, such things as farmhouses, livestock, and machinery were taxed. Because these forms of property were directly linked to the amount of income an owner generated, the tax was a reasonable way to collect funds for local government.

The modern property tax is rooted in the medieval feudal systems of Britain and other European countries, in which people (called vassals) were allowed to occupy land in exchange for allegiance to the lord who owned it. In the fourteenth and fifteenth centuries the British tax assessors (the public officials who establish the value of property for the purpose of determining the amount of tax due) estimated the taxpayer’s ability to pay based on whether or not he or she owned property. The tax collected was given to the king or landlord.

In the United States the development of property taxes was closely related to the economic and political conditions of the frontier. Property taxes in small, growing towns and communities were one of the most reliable ways for local governments to collect income.

More Detailed Information

In the United States property taxes are usually based on the value of the property. This kind of tax is known as an “ad valorem” tax. The term comes from ad valentiam, a Latin phrase meaning “to the value.”

The amount of property tax that a local government imposes can be determined either by the full value of the property or a certain percentage of the full value. This means that 100 percent of the value of a piece of property can be taxed, or a smaller percentage, such as 50 percent, can be taxed. The percentage of the value of the property that is taxed is known as the assessment ratio. If the tax rate is 2 percent, the assessment ratio 50 percent, and the assessed value of the property $100,000, then the property tax due would be $1,000 ($100,000 times 2 percent times 50 percent).

There are two basic categories of property: real and personal. In general, real property is land and anything that is permanently attached to land (such as buildings or wells). Typical examples of real property are homes, apartments, offices, and the land on which such buildings stand. Personal property is any property that is not real property. In most cases personal property is movable and does not hold its value as long as real property. Examples of personal property include vehicles, farm equipment, jewelry, household goods, and stocks and bonds (financial investments).

All real and personal property is subject to taxation unless it is tax-exempt, meaning it is released from the tax obligation. A building used for religious or charitable purposes would most likely be exempt from taxation. Housing for low-income residents or veterans might also be completely or partially exempt. State and local governments use exemptions to encourage certain types of development or to help attract new businesses.

Property usually changes in value over time. In order to determine the accurate amount of property tax, therefore, the property’s value needs to be periodically appraised. An appraisal, completed by an impartial expert who is not invested in buying or selling the property, gives an approximation of its value. When the property changes in value, so does the appraised value.

One factor that can change property value, particularly real estate value, is the economy of the surrounding area. For example, the introduction of expensive homes in an area can positively affect the value of nearby property, as can an increased demand for housing. Likewise, a poor local economy, slow economic growth, and low demand for houses in a particular area can depress property values.

Recent Trends

In many places the money collected from property taxes often goes directly toward the local school system, allowing a wealthier district where homes are worth more to fund its schools with a lower tax rate than the one a poorer district would have to set in order to bring in the same amount of money for each student’s education. Some states rely more heavily on property tax than others, but tax rates have increased nationwide since the 1990s.

In the late 1990s the rate at which income levels grew in the United States was higher than the rate at which property taxes grew. In 2000, however, the stock market experienced a downturn (meaning that people’s investments in companies began to lose value), and a recession (economic decline) followed. After that, housing prices started to soar, even though personal income levels grew only moderately. As a result, revenues from property taxes increased faster than any other major tax source, including income and sales taxes. Many economists suggested that the U.S. economy was being strongly supported by a “housing bubble,” meaning that real estate was assessed at higher than actual values. If this bubble were to burst, the result could be significant for school districts that rely heavily on property taxes.

If property values fall, local governments, and specifically school districts, might react in one or more ways. They might raise property taxes in order to bring in the necessary revenue. They also might cut spending on schools or request funds from the state or federal government.