Property taxes generate the revenue that states need to keep themselves up and running and to provide necessary services to their residents. School districts tend to rely heavily on these taxes, but the revenue also funds city and state workers’ salaries—including first responders—as well as water, sewer, and other services.
How Property Taxes Are Calculated
A lot of complicated math is used to calculate property taxes, and states compute rates according to their own unique formulas. All share two important components, however: a property’s assessed value and the tax rate. The percentage tax rate is applied to the value to arrive at your tax bill. Someone in State A might pay $10,000 a year on a home worth $1 million, while someone in State B pays $10,000 a year on a condo worth $150,000. The person in State B has a far more onerous tax burden. The person in State A is paying only 1% of their home’s value while the State B resident is paying almost 7%, even though they’re paying the same tax dollar amount.
Who Sets Home Values?
You can’t simply tell the state, county, or municipality how much you think your home is worth and let them take it from there. Your home’s value for tax purposes is based on its appraised value, and the appraiser isn’t an independent third party. Tax assessors typically work for the government. You can expect your tax bill to go up if you add a second floor to your home or put an in-ground swimming pool in your backyard because improvements such as these will most likely increase your home’s value. You could find yourself paying more in property taxes even if your state’s tax rate remains unchanged because that percentage rate is applied to a larger value.
How the Appraiser Arrives at Value
The values of recently sold homes in your area can be taken into account when calculating value. The appraiser will compare your home to others similar to yours and value it based on those sales prices, using a method known as the market approach. The cost approach is based on how much it would cost to replace your home, although this method is used less frequently with residential properties.
The 10 Best States for Property Taxes
Based on survey results from the 2019 American Community Survey (ACS), below are the 10 U.S. states where homeowners pay the least amount of property (real estate) tax. Note that the figures in the tables below are median figures from aggregate data—in each state, half of all taxes paid are higher, and half are lower.
The 10 Worst States for Property Taxes
The American Community Survey also turned up the states where property owners pay the most property tax.
How Does Your State Rank?
The Correlation With Other Tax Rates
Some states that impose formidable property tax rates give residents a few breaks in other major tax categories. For example, Texas taxes property at a significant rate, but it has no state income tax. The state relies heavily on property taxes to make ends meet. Other states such as New Jersey and Illinois impose high taxes across the board, however.
Property Tax Relief
Several states offer various options to reduce the burden of these taxes.
Some provide property tax exemptions to senior citizens, veterans, and the disabled. Several states offer homestead exemptions for at least a portion of a home’s value if the owner resides there and it’s not a rental or investment property. Homeowners might also qualify for a state tax credit in some areas based on the amount of their property taxes. You can also claim a tax deduction for property taxes on your federal return if you itemize your deductions, subject to some limitations.
The worst thing you can do is ignore your tax bill if it’s not included in your monthly mortgage payment, which is often the case. Simply not paying can invite disaster in the way of tax liens and foreclosure.
