Property Tax

Setting the Tax Base

To set the tax base, first, the assessed value (taxable value) of each piece of property is computed by an assessor from an estimate of the market value of the property made according to a specific set of procedures, usually established by state law. Once the market value is established, the assessed value is set by law or practice as a specific percentage of market value. This percentage is the assessment ratio. Tax assessors are generally professional employees of general-purpose local governments such as cities or townships, although in some areas assessors are still locally elected officials. In most states, local assessors are bound by state laws and procedures, and their assessments are subject to county and/or state review. If different types or classes of property (e.g., residential, commercial, industrial, agricultural) are assessed according to different assessment ratio rules so that the effective tax rate (i.e., tax paid divided by market value) varies by class, the tax is called a classified property tax. Under a classified tax, residential property is usually assessed at a lower ratio than commercial and industrial property. Classification allows government to alter the relative property tax burdens among different types of property. In addition, some types of property may be exempt from property [Page 819]tax. In these cases, the assessed value is implicitly set equal to zero, although in practice exempt properties usually are not assessed.

The property tax base, or net assessed value (NAV), is established at the standard assessment date (“tax day”) for the taxing unit (e.g., school district, city, township). As noted above, assessed value is generally a statutorily defined percentage of the value initially appraised by an assessor. The most widely used standard for property appraisal is market value, or cash price a property would bring in a competitive market. Since records are kept on home sales, determining the market value of homes is relatively straightforward. For homes that have not sold recently, sale prices for comparable homes are used to set market value. However, while this approach is technically feasible, maintaining updated tax rolls entails political as well as technical challenges. Some feel it is unfair to tax a homeowner on unrealized gains in home value, as happens where tax rolls are updated regularly.

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