State and local governments assess many different types of taxes to generate revenue. Typically, one of their largest revenue sources is property taxes. These can be on real property (e.g., real estate like homes and vacant land) and some forms of personal property (e.g., tangible personal property, like vehicles, and business personal property, such as equipment). Taxing authorities typically calculate these "ad valorem" taxes, which are "according to the value of," by using a millage or mill rate.
What is a millage rate, and how is it calculated?
Derived from the Latin word "millesimum," millage or mill means "thousandth part." Millage or mills represent the amount of tax for every $1,000 of a property's assessed value. Thus, a mill is one-thousandth of a dollar, or $1 of tax for every $1,000 of a property's assessed value.
To calculate the millage, or mill rate, a property owner divides the number of mills by 1,000. For example, say a local taxing authority has a mill rate of 15 on the assessed value of real property in its jurisdiction. That puts the property tax rate at 1.5% before any adjustments or exemptions.
What are property taxes, and how do they work?
Millage rates and property taxes are often linked together because taxing authorities use mills to determine property taxes. These taxes enable states, local governments, and school districts to generate revenue so they can support their operations. Property taxes are standard on real property, while some tax agencies also levy them on personal property owned by individuals and businesses.
Property taxes have two main components. First, they are an ad valorem tax, meaning they're based on the value of the property. For real estate, taxing agencies use the assessed value. They typically determine the value of other types of personal property by an appraisal or use its depreciated value.
Once the taxing agency determines the value of a piece of property, they'll apply the mill rate, which dictates the owner's tax liability. Taxing authorities typically set the mill rate each year as part of their budgeting process.
How is property tax derived from millage rate?
Taxing authorities determine the amount of property tax owed by using the mill rate. Property owners can calculate the property tax by first dividing the total mills by 1,000. Then, multiply that amount by the property's taxable value.
Because several taxing authorities can levy a mill rate on a piece of property, a tax bill might have several line items. For example, a homeowner might receive a property tax bill where the county government levied five mills, the school district levied 15 mills, and the city levied 10 mills. That adds up to 30 mills or $30 of tax for every $1,000 in assessed value. If the local assessor's office recently gave this home an appraised value of $250,000, a homeowner could perform the following calculation to determine their effective tax rate:
30 mills / 1,000 = 0.03 millage rate
0.03 X $250,000 = $7,500 property tax bill
Thus, this calculation results in an effective property tax rate of 3%.
The millage rate helps set property taxes
Property tax bills often seem confusing because taxing agencies use millage to determine the amount of taxes they levy, instead of something more familiar, like a tax rate. However, property owners can perform a relatively simple calculation to convert mills into an easily understandable effect tax rate. That should help property owners get a better understanding of what rate they're paying for property taxes.