G. Additional Exercises
- What is the maximum percent of taxable income that a single person in the 25% tax bracket could actually have to pay
in federal income taxes? What is the minimum percent? - A star baseball player signs a contract under which he will be paid $17.5 million next year. How much will he pay in
Social Security payroll taxes? What percent of his income does this represent?
398 Chapter 9 Taxes
9.3 Property Taxes
Property taxes are, as the name suggests, taxes that must be paid on certain types of prop-
erty. Real estate taxes are the most widespread and financially significant form of property
taxes. In some places, there may also be a personal property tax in effect, which must be
paid on certain types of personal property such as cars or other goods.
In the United States, real estate taxes are state or local taxes, often assessed by towns,
counties, cities, and/or school districts. Since they are primarily local taxes, the amount
of tax charged on property therefore will vary from one locality to the next. Two identi-
cal houses that sit directly across the street from each other may be charged significantly
different real estate taxes if the street is a border between two different towns or school
districts. While the rate of taxation may vary dramatically from one place to another, real
estate taxes are a fact of life virtually everywhere.
Despite local variation, the overall level of real estate taxation tends to vary most
dramatically from state to state. Even though these taxes are not necessarily state taxes, the
overall tax structure in a state will affect how much of their revenues local governments
expect to collect from real estate taxes. In states where much revenue is obtained from
sales and income taxes and then shared by the state with local governments, the need
for real estate taxes may be less than when this does not occur. In a state like New
Hampshire, for example, where there is no sales tax and personal income taxes are quite
limited, property taxes might be expected to be relatively high; the money to run the
government has to come from somewhere. In states that collect more from sales and/or
income taxes, the need for revenue from property taxes may be less, and hence the prop-
erty tax rates may be lower. Of course, the overall level of government spending is often
a much more significant factor. Sales and income taxes provide plenty of tax revenue
in New York for example, yet property taxes are not known for being especially low in
that state.
In this section, we will focus on real estate taxes. The mathematics underlying personal
property taxes is similar, though the specific details of what types of property are taxed and
how the tax is assessed and collected will vary from one jurisdiction to another.Assessed Value
The amount of tax owed on a given property is determined by applying a tax rate to the
property’s assessed value. The assessed value is a value assigned to a property for tax
purposes. It is natural to assume that the assessed value of a property would be its actual
market value. This is not necessarily the case.
First of all, it is not realistically possible to determine the actual market value of a given
piece of property exactly. The market value of a property varies over time, and depends on
a wide range of factors. The tax assessor, the government official responsible for determin-
ing assessments, may take a reasonable appraisal of market value into account when deter-
mining a property’s assessment, but will generally base the assessment on factors such as