11.3 Property Tax Rates

The setting of the property tax rate occurs as part of the annual budget process. The rate is determined by the following formula:

$$r = \frac{E-NPR}{AV}$$

where $r$ represents the tax rate, $E$ is the budget expenditure, $NPR$ stands for non-property tax revenue, and $AV$ is the assessed value. By setting property tax rates during the budgeting process, officials are able to balance the budget and avoid borrowing. However, fluctuations in tax rates might lead to political unpopularity of the tax.

In terms of terminology, the mill rate refers to the property tax rate expressed in mills, meaning one dollar of tax for every one thousand dollars of assessed value. The relationship between the mill rate ($m$) and the tax rate ($r$) is given by:

$$r = \frac{m}{1000}$$

For example, if the mill rate is $m = 7$, then the tax rate is:

$$r = 0.007 = 0.7\%$$

When it comes to tax revenue, the notation used includes $TR$ for tax revenue and $AV$ for assessed values. Tax revenue can be calculated based on the tax rate $r$ with the formula:

$$TR = AV \cdot r$$

Alternatively, it can be calculated using the mill rate $m$ with the formula:

$$TR = \frac{AV}{1000} \cdot m$$

In this illustration, we consider taxable real property valued at $220 million with an assessment ratio of 0.5. Exemptions reduce the assessed value by $3 million, and the total budget amounts to $3.5 million, with non-property tax revenue contributing $0.75 million.

To calculate the statutory tax rate:

The gross assessed value is:

$$220 \, \text{million} \times 50\% = 110 \, \text{million}$$

The net assessed value is:

$$110 \, \text{million} – 3 \, \text{million} = 107 \, \text{million}$$

The statutory tax rate is calculated as:

$$r = \frac{3.5 - 0.75}{107} = 0.0257$$

This corresponds to a mill rate of:

$$m = 25.7$$