11.7 Exercises

  1. Mayor’s Statement (*): In their annual budget message, a mayor announces that they are “pleased that due to sound financial planning and careful budgeting, property tax rates will not increase.” Yet, the city’s revenue from property taxes is expected to increase by more than 10% according to the budget. Assuming the statement of the mayor to be correct, explain the discrepancy between the statement and the budget.

  2. Property Tax Equity Characteristics (**): Property taxes are based on the benefits principle and measure ability-to-pay based on home value. Explain how the property tax is related to both principles. In addition, for each of the two principles (i.e., benefits principle and ability-to-pay), provide one scenario in which the property tax fails to satisfy the principle.

  3. Homestead Exemption versus Circuit Breaker (***): There are two families with different income and different home values. The current property tax rate is 1%. The mayor of the town has asked you to evaluate two proposals: (1) Homestead exemption and (2) a circuit breaker. The homestead exemption amounts to $10,000 on the assessed value of owner-occupied residential property. The circuit breaker credit (\(CB\)) is equal to \(CB=PT–b \cdot I\). The variables \(PT\), \(I\), and \(b\) are the property tax payment, income, and share of income considered to be a high, respectively. When the property tax payment exceeds the acceptable property tax burden, i.e., \(b \cdot I\), the difference is the income tax credit. If \(b \cdot I>PT\), then the credit is set equal to zero. Complete the table below based on the information given. Evaluate all three tax systems (i.e., current, homestead exemption, and circuit breaker) in terms of vertical equity (based on income). An Excel template of the below table can be found here.

    Information Family A Family B
    Total Income $40,000 $80,000
    Assessed Value $110,000 $160,000
    Property tax rate 1% 1%
    Homestead exemption $10,000 $10,000
    Property tax burden parameter (b) 1% 5%
    Existing Tax System
    Property tax amount
    ETR (income)
    Homestead exemption
    New tax base after applying homestead exemption
    Property tax amount
    ETR (income)
    Circuit breaker
    New tax base after applying circuit breaker
    Property tax amount
    Acceptable property tax burden
    Circuit breaker tax credit
    Property taxes minus credit
    ETR (income)

  4. Property Taxes and Public Services (***): The necessary information for this question can be found in the sheet PROPERTY TAXES AND SERVICES in the PropertyTaxesTemplate.xlsx file. For this question, you are going to calculate the tax bill for each parcel based on the information provided. The approach to solve this question is covered in the Property Tax video. You have 25 parcels and 4 services, which are each subdivided into 3 districts. Calculate the millage rate and property tax bill for each parcel.