Question

As a homeowner in the City of Bloomington you are interested in calculating the Effective Property...

As a homeowner in the City of Bloomington you are interested in calculating the Effective Property Tax Rate you expect to pay on your property. Based on the following information, calculate the ETR of your property for BOTH of the following scenarios. It is fine to work in groups but you must turn in your work and your work only.

Scenario 1)

You know from government legislation that the legal tax rate on your property is 2.4% and the city’s assessed value of your property is $155,000. However, your property is currently on the market for only $60,500 due to a significant downturn in the housing market.

What is your Effective Property Tax Rate?

Scenario 2)

You know from government legislation that the legal tax rate on your property is 2.4% and the city’s assessed value of your property is $155,000. However, your property is currently on the market for $175,000 due to a recent boom in the housing market.

What is your Effective Property Tax Rate?

Analysis:

Compare and analyze the two ETRs. How did the change in market value affect the property ETR? Would you prefer your home to be undervalued or overvalued by government assessors before you pay your property taxes?

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Answer #1

Scenario 1 - Property tax payable = 2.4%*1,55,000 = $3,720

Property value as per market Rate = 60,500.

Therefore ETR = Property Tax/Property Value as per market Rate

= 3720/60500 = 6.15%.

Scenario 2 -Property tax = $3,720 (same as rate is 2.4% on 1,55,000)

Property Value = 1,75,000

ETR = 3720/175000 = 2.12%.

The Base for calculating ETR is taken as the property Value that is prevailing as per the market rate, which gives us the fair estimate. Effective tax rate for a property is the rate at which the property is taxed. Since the base of ETR i.e. the property value has increased in Scenario 2 the ETR has reduced considerably and the Numerator i.e. the taxes are constant therefore ETR has decreased.

In Case of Scenario 1 property is Overvalued by the government Assessors.

In Case of Scenario 2 property is Undervalued by the government Assessors

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