The concepts behind the calculation of a property tax bill are pretty simple. We'll follow the path of the property tax bill for old Mr. MacDonald, who has a farm. Here is the basic formula:
((Property Value x Assessment Rate) - Exemptions) x Property Tax Rate = Tax Bill
The biggest variable in a property tax calculation in a given assessment area is usually the value of the property. Let's say that a recent appraisal valued Mr. MacDonald's property at $800,000.
His property would be added to what is usually called an assessment roll, a long list of all the taxable properties in an assessment area.
The assessment rate is a percentage set by the local government. This rate varies widely, from 33.33 percent in most of Illinois to 1 percent in Los Angeles (which adds other debt service tax rates to the assessment rate) [sources: Illinois Department of Revenue, Los Angeles County Office of the Assessor]. If a government needs to increase the revenue from property taxes, it's more likely to change the assessment rate than to change the property tax rate. Let's say the assessment rate in Mr. MacDonald's area is 10 percent.
$800,000 x 0.10 = $80,000
An exemption reduces the property assessment value. Many states have homestead exemptions and exemptions for senior citizens and the disabled. Let's say that Mr. MacDonald's property is eligible for $50,000 in exemptions.
$80,000 - $50,000 = $30,000
So, the taxable value of Mr. MacDonald's property is $30,000.
Actual property tax rates vary widely but are generally limited by law. Let's say the property tax rate in Mr. MacDonald's area is 2 percent.
$30,000 x 0.02 = $600
Mr. MacDonald's tax bill is $600. This $600 goes toward relieving the $2.5 million the local government needs to fill out the budget.
You might be thinking about how a property tax bill could change over the years. Go to the next page to learn about various factors that influence the size of a tax bill.