Tax Reassessment – Does a Declining Market Mean You'll Pay Less Property Taxes?

Tax reassessment has been the main topic of discussion more times in the last six months than it has been in the last ten years. There seems to be a misguided assumption that if property values decrease then property taxes will also decrease. Of course, this is based on the fact that when property values increase so will the taxes. Unfortunately, the former is mostly false while the latter is mostly true.

Like everything else, all you have to do is follow the dollar to see why it works this way. I'll explain.

Every county, city and municipality across the country needs money to pay for basic services such as the police, firemen, schools, payroll...and the list goes on. This money, in large part, is provided for by property taxes.

Let's assume this year is a tax reassessment year and your county needs ten million dollars to meet its budget demands, up from eight million three years ago. This amount includes the basic services described above along with all current and future projects that have been approved by the board of trustees.

Once the budget amount has been calculated (ten million) the tax assessor will reassess the property values in order to meet the budget amount.

The tax assessor will take into consideration the estimated property value, proposed assessed valuation, state equalizer, exemptions and the current tax rate when establishing property taxes.

The following is an example:

Let's say your home is worth $100,000 and the county has your assessment level at 10%. Your tax will show a home value of $10,000. This is called a Proposed Assessed Valuation.

The tax assessor takes the Proposed Assessed Valuation and multiplies this by something called a State Equalizer. In this example, the State Equalizer is 2.8439. When you multiply the Proposed Assessed Valuation with the State Equalizer you'll get the Equalized Assessed Value, or $28,439.

Once the tax assessor knows the Equalized Assessed Value he'll subtract any type of exemptions you might have such as a home owner's exemption or a senior's exemption. If this home is your primary residence then you'll qualify for the home owner's exemption of $5,500. This means your Adjusted Equalized Value is $22,939.

Finally, the tax assessor will multiply the Adjusted Equalized Value with the Tax Rate which is adjusted every tax reassessment year. This year, the tax rate is 10%. When the Adjusted Equalized Value is multiplied by the tax rate ($22, 939 x 10%), the resulting number is your estimated property tax bill or $2,293.

Ok, now we'll put it all together.

We know the county needs ten million dollars to meet its budget. However, the tax assessor has valued your home at $90,000 instead of $100,000.

Logically speaking you should only have to pay $2,009.51.

Breaking it down would look like this: $90,000 x .10 x 2.8439 - $5,500 x .10 = $2,009.51.

However, just because your property value went down doesn't mean the county budget obligations have gone down. The county still needs its ten million dollars regardless of what happens to your property value.

So how does the county get away with collecting the same amount in property taxes (or even more!) when your assessed property value decreases?

Simple! They adjust one of the other variables, most likely the tax rate.

Let's say the tax assessor did indeed lower your assessed property value to $90,000 but the county still needs the original of $2,293. In fact, they need a little more. By raising the tax rate from 10% to 15% you'll pay $3,014.26 in property taxes. Again, here is the breakdown:

$90,000 x .10 x 2.8439 - $5,500 x .15 = $3,014.26.

Do you see what just happened? Your home value went down ten percent but your taxes still went up.

The bottom line no matter what your property value is the county will always get the money it needs to meet its budget.