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What is Property Tax & How does it Work

If you don’t own a home, or maybe even if you do, you may have wondered what is this “property tax” I hear people speak of, usually in distaste. Property tax is the third of the three major pillars of taxation in the US and most of the world. We all know income tax, and we all have experienced sales or VAT tax, but property tax is only paid by those who own property.

So what is property tax? In broad terms its a tax you pay on the value of a property you own. So for example if you own a house that is worth $1,000,000 (I was going to use $100,000 and thought oohh that is too small for these days), and your local property tax adds up to 1% then you will need to pay to your local government $10,000 a year. Each place is different but as the value of your house or property goes up, your annual bill will also go up. The rate varies from place to place but in California its about 1.25%, Texas 2% and Idaho .9% just as some rough examples.

So why are you paying this tax? For income tax we know that goes to the state and federal government to pay for Social security (yes that’s a separate tax but in the end it is just another income tax), Medicare, Military, debt payments, Social programs, FBI, CIA, NSA, etc. etc. Sales tax at least in the US is used by states (in Europe countries also implement VAT taxes which are similar) to raise revenue in addition to income taxes. This usually goes to your state to run all the state level governmental functions. Property taxes on the other hand usually have to do with the city and county that you live in and those funds are used to support programs for the community that surrounds you.

For example I’m looking at my house tax bill right now and it includes, Flood Control, Sewer, County Parks, Light Maintenance, Fire department, School district, Water district, Community College and a few more. So in general property taxes are the way cities and counties fund themselves. Looking at my local city’s budget, they received about 40% of their revenues from their share of property taxes.

Now as with all things some of these taxes get a little complicated, for example the taxes you pay for your local school district don’t all go to your school district but funnel up to the state and then are redistributed so that rich communities get less of what they produced and poor get more to help equalize education. And there are lots of other little caveats like that, but in general you can think of your property tax as one of the primary drivers for funding your local communities governmental activities.

There is a whole lot of philosophical discussion you can have on this matter, in terms of fairness and value which are beyond the scope of this post. Though, one thing I have always found interesting about property taxes is that their existence means that nobody actually owns property, we are only renting it from the government. A property owner does not have the choice in the matter and if they do not pay their taxes, their property will be taken from them by force. Its the compromise we make to live in our society, but one I don’t know how many people actually think about in those terms.

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