Property Taxes and How They Differ State by State

by James SheaDecember 4, 2018

When buying a house, you have to factor in the cost of property taxes. After your mortgage, property taxes will most likely be the second largest expense when buying a home. Property taxes are a vital revenue generator for local governments. They finance schools, hospitals, county and city government operations, and are one of three main funding sources for local government – property taxes, sales taxes and income taxes.

House with money and tax paper concept.

“You might say it’s like the three legs of a stool, so when you take one leg away, the funding stability is reduced,” said Stephen Miller, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas. “If you want government services, then the payment of that has to come from somewhere else.”

How Are Property Taxes Calculated?

While property tax rates may vary from state to state, they’re generally calculated the same way. To start, the local tax assessor will determine the value for your house. The assessed value isn’t necessarily the same value as the price your home sold for or could sell for. It’s the value that the assessor determines your home is worth. Values are generally assessed every one-to-five years, depending on local laws. Assessed value is determined one of three ways:

  • Sales comparison: An assessor selects similar properties in the area and looks at sales. The sale prices are compared and a value is established for the property. Some adjustments can be made for individual features within the home, like a custom kitchen or patio addition.
  • The cost method: The assessor determines the amount of money and material that’d be required to rebuild a piece of property. It requires certain assumptions like the availability of land and the stable cost of building materials.
  • The income method: The income method is generally used on commercial properties. The assessor determines the income a property could generate and the value is then determined based on specific market factors.

Man using calculator and counting budget, expenses and savings.

How Are Taxes Calculated Based on Assessed Value?

Once the assessor’s office has determined the assessed value of your home, the property tax is calculated. That’s done through a mill. One mill equals one-tenth of one cent or $1 for every $1,000 of a property’s value. Different county and city governments set the mill rate differently. Often, the mills are broken down so a certain amount is used to fund particular operations. For example, lets assume that your property assessor values your property at $250,000, and your local mill rate is 45. You multiply the property’s value by 4.5 percent to arrive at your tax bill. That’s $11,250. If your mill rate is only 15, your tax bill becomes to $3,750.

Property Taxes Vary

Property tax rates can vary from state-to-state depending on both the mill rate and the assessed value. A town might have a high mill rate but low assessed values. On the other hand, a county might have a high assessed value and a high mill rate. ranked states in order based on property tax rates. To make the list easier to understand, the states were rank based on the tax rate as a percentage of home’s value.

Top 10 Best States for Property Taxes:

1. Louisiana (0.18 percent)

The state boasts the lowest property tax rate in the country for residential property, but businesses property taxes actually have a high rate, as inventory is taxed. The result, businesses end up paying nearly 90 percent of all property taxes. However, according to the Tax Foundation, Louisiana has the fifth-lowest effective tax rate in the nation at $2,950 per capita.

2. Hawaii (0.26 percent)

Compared to other states with high-value real estate, the Aloha State has one of the lowest property tax rates in the country.

“For a $1 million home here, the annual property tax is around $3,200. For a $1 million home in New Jersey, it’s about $24,000,” Gavin Thornton, co-director of the Hawaii Appleseed Center for Law and Economic Justice.

Given that a larger amount of the economy is based on tourism, the state has the third-highest combined sales tax.

3. Alabama (0.33 percent)

Alabama, in general, has low property values, but it also has a low property tax rates. The average 2016 property tax bill in Alabama was $776, but there’s a trade off with low taxes rates. Alabama has some of the worst schools and roads in the nation.

“Don’t move to an area just because the property taxes are low,” said Kiplinger’s associate editor Sandra Block. “If the roads are worn and the schools are terrible, then you need to have a discussion.”

Other states include: Delaware (0.43 percent), District of Columbia (0.46 percent), West Virginia (0.49 percent), South Carolina (0.5 percent), Arkansas (0.52 percent), Mississippi (0.52 percent), and New Mexico (0.55 percent).

Top 10 Worst States for Property Taxes

1. New Jersey (1.89 percent)

A recent study by WalletHub calculated that an average property tax bill in New Jersey was $7,601. That’s nearly 14 times the amount residents might pay in Alabama. The state also has the second highest corporate tax rate and the worst tax structure. Another study found that New Jersey’s tax structure is the worst in the nation.

2. New Hampshire (1.86 percent )

New Hampshire touts the highest mountains in the Eastern United states, but it also has one of the highest property tax rates in the country. An average property tax bill in New Hampshire is $4,038.

“The lack of sales and income tax does, for the most part, balance things out,” WalletHub analyst Jill Gonzalez said.

3. Texas (1.81 percent)

Texas is known for being independent, but it has very high property tax rates. In recent years, residents have pushed for a reduction in property taxes. Those discussions have generally gone nowhere, because local governments depend on the revenue.

“The factors that are driving those higher property tax rates in Texas is primarily the fact that Texas governments rely [more] on the property tax to fund local services than other parts of the country,” said Adam Langley, a senior analyst at the Lincoln Institute of Land Policy.

Other states include: Nebraska (1.76 percent), Wisconsin (1.76 percent), Illinois (1.73 percent), Connecticut (1.63 percent), Michigan (1.62 percent), Vermont (1.59 percent), and North Dakota (1.42 percent)

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About The Author
James Shea
James Shea is an award-winning journalist and author. He owns Media Lab, a content marketing and search engine optimization company is Richmond, Virginia.

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