This week my city, Middletown CT, began sending out re-appraisals of properties. They do this every five years (there are adjustments in between those 5-yr re-appraisals, but they're not significant).
As a result of the housing boom of the last few years, everyone is getting re-appraised higher - some a lot - and there's a lot of hand-wringing from residents about how their taxes are about to skyrocket. Comments such as, "my assessment went up 40%, I can't afford a 40% increase in taxes!" are common.
This shows a misunderstanding of how property taxes are calculated (at least within our city). First and foremost, your taxes are not going up 40%; they may not go up at all. So being the nice guy I am, I'm trying my best to tamp down the panic. Unfortunately, being the engineer that I am, I'm trying to describe this in long sentences (and using math) which is, unsurprisingly, mostly ineffective especially in a 140-character (OK, 280-character) environment. So I'm going to try to describe it here with longer paragraphs (and even more math) and maybe some folks will understand, while others can maybe help me by translating it into 140 characters for me (my suggested first post: don't panic!)
I'm going to use Middletown's 2020/2021 budget year for examples, rounded off; these can be found at Middletown's really informative and useful web page, https://www.middletownct.gov/ I'm using the prior year instead of 21/22 because the discussion gets more complicated with a motor vehicle mill rate change in 2022; more on that in the epilogue.
Caveat: everything I'm describing here is my perception of how my city does it, based on the public info available. I am not involved on this process directly, only as a curious taxpayer. Also, I cannot promise my situation is the same as yours (well, unless of course you live in Middletown CT). And yes, in many ways this description is quite simplified...but in the end, and generally speaking, the process is really this simple.
Caveat, Part Deaux: this blog post is not for the "TL;DR" crowd. My simple advice for them: don't panic!
OK, here we go.
Property taxes are "ad valorum" taxes. An ad valorum ("to the value") tax is one that is based on the appraised value of property such as real estate, personal property, and motor vehicles. Property taxes are paid by property owners to cover the costs of government; the understanding here is that property owners receive the benefits of government therefore they should fund the costs (I ain't here to debate that concept, I'm just here to talk about it...)
There's other forms of city/taxing district/municipality taxation (I'm using these terms interchangeably) such as local sales and even income taxes; there are also other forms of city revenue (which I'll touch on later). But property taxes are the most widespread form of funding for local governments.
The basic calculation for property taxes is that if, for example, you own 1% of the property in the city, then you are expected to pay 1% of the costs of its government; "pro rata", or "in proportion".
Those property taxes are calculated by someone (or someones) going all around the city and appraising all the value of all the things in it: land, homes, vehicles, even personal property inside the home (yes, technically we pay property taxes on our sofas). Businesses are appraised for things like land, buildings, the internal machinery, and even office supplies!
The value of everything you, yourself, own is called your Appraised Value.
The sum of everyone's appraised values in aggregate is called the Grand List (sorta, read further below).
To calculate your share of the cost of the city, you divide your Appraised Value by the Grand List to see what percentage of the town you own, thus what percentage of city government you as a property owner are responsible for paying.
Let's say, for example, that your home is appraised at $100k, and the Grand List is three point six billion dollars (say that with your pinky in the corner of your mouth). Your percentage of land ownership is:
$100k/$3.6B = .0000278, or .00278%
Feeling rich? So, you the property owner will be responsible for paying .00278% of the cost of your city's operations.
Side note: there are many properties that are not assessed taxes and are therefore not on the Adjusted Grand List; churches and other non-profits, and city-owned facilities, for example, as well as exemptions for blind persons, elderly tax relief, etc. As another example, there is a Very Large Package Distribution Facility in our town that has a long-term tax abatement due to carrots that were thrown at them by our State to get them to build in that unused location. One certainly can (and no doubt, will) argue the merits and values of such a tax abatement, but the bottom line for the rest of us property owners is that they are not paying property taxes, thus are not on the Adjusted Grand List. This reduces the Grand List which, simple math, increases our individual percentages of the Grand List, therefore increasing our individual property taxes. Taxed property owners are, literally, covering that company's property taxes while they're under that abatement. But these are the decisions that we made to attract that facility; history will show if these were sound decisions (I will offer that they create a lot of local employment).
Anyway, so now that you know what percentage of the government you have to pay for, how do you determine the costs of government? That, my friends, is your city's annual budget.
My City Council meets every year to set its budget, subject to elector (voter) approval. The Council will spend a lot of time figuring out what money it needs to operate the next year. That process will vary in other places, and how much money they'll need will absolutely vary between places, but I'm confident your city does something similar. After a lot of argumentatation they'll eventually come up with a budget and send it to the voters for approval (you read your city's budget every year, yeah? And you take the time to vote for it, right? Check the links at the bottom for Middletown's proposed 2022/2023 budgets).
Fortunately, most cities - Middletown is a good example - have other forms of revenue besides property taxes. Water and sewer, for example, are paid for by fees even though the costs of water and sewer are part of the main expenditure budget. Sometimes fire costs are also part of the expenditure budget but you're charged separate city fire taxes. My city's revenue budget carries both of those services/revenues plus "Licenses & Permits", "Charges for Services", "Intergovernmental Fees", and so forth. This even includes predicted interest income (cities always keep cash flow handy, "just in case". You seriously do not want your city to run out of cash flow if something unexpected happens.)
All that is factored in as revenue before the balance of the cost of government, due by property owners, is calculated.
Our example budget shows $198M in total expenditures with $80M in revenues from other than property taxes. That leaves $118M that needs to get paid for...by us, the property owners.
OK, so how do I figure out what my share of the cost is?
Theoretically, you could just take your pro rata share of property ownership (.00278%) and multiple it by that remaining part of the revenue budget:
.0000278 x $118M = $3,278
Rather than a percentage of the town you own, "mill rate" represents the dollar amount that you will pay in taxes per thousand dollars ("mill") of property value; that number is multiplied by 1000 for presentation purposes (people generally prefer seeing whole numbers). In our example above, the mill rate is "32.78 mills".
OK, you may say, but...dang it, how much taxes will I have to pay using mill rate?
Using mill rate calculation, your taxes are the mill rate, times your appraised value, divided by 1000:
32.78 * $100k / 1000 = $3,278
...aaaand it's exactly the same tax number. So mill rate is an interim way to get there - maybe they don't think we'd understand it otherwise? - but in the end, we get to the same place, we just have to go 3/4 of the way around the roundabout to get to the same exit.
OK, so we're done...right? Hah hah NOPE. Notice that everywhere above I've used the term Appraised Value and have never written Assessed Value? You've probably noticed that your tax bill is based on assessed value, right? Right!
So what's up with that? Well, I've been a tad bit untruthful to you; all the numbers above are actually the Assessed Values. The difference? In the end, absolutely nothing. In my opinion, it's just another parlor trick, more smoke and mirrors. CT General Statutes allows that "all property is assessed at a uniform rate of 70% of value, Sec. 12-62a, Gen. Stat" and that's what's reported as Grand List.
But wait, we're told that we only have to pay property taxes on 70% of our property value!
Hey, who doesn't like a discount? Except it isn't a discount. Remember, you're responsible for your pro rata share of the costs of government and if you're getting a 70% discount then everybody else is getting a 70% discount too! So all we're doing is conflating numbers to get a different mill rate. But in the end, it's still gonna be "your percentage of property ownership times the amount of money that the city needs to be paid by property owners."
No matter how we figured it, someone doesn't like the way we figured it! (Obscure movie reference, let's see who gets it).
Knowing what you know now, and how all this is calculated, take a moment to reason if Greenwich's mill rate is higher or lower than Bridgeport's? No cheating, this is your final exam...ok, you can look it up now.
Yup, tawny Greenwich with all its expensive property has a lower mill rate than Bridgeport. And what does that mill rate tell you? Right, absolutely nothing. A-plus.
The whole point of this blog post - I told you we'd get there - is to recognize that increases in overall appraised value will result in an increase of the Grand List, and given no changes in the budget the mill rate must reduce. But, despite that mill rate reduction, given no change in your pro rata percentage of property ownership or the City budget, your property taxes will not change.
And thus, appraised values and mill rate as a comparator of relative cost of taxes between towns is mostly a waste of time, since it's not all of the info that you need to make a decision.
Yes, this is all general theory - there's nuances for each town - but the point is, don't let these re-appraisals scare you. Appraisals went up, so rejoice, your net worth has increased! But so has everyone else's net worth. So you just can't worry about your property tax increases until we see how it affects everyone else's (and trust me, we all went up -- a bunch).
And if your home did not go up as much as everyone else's (is that good or bad thing?) then your property taxes may actually go down!
Bottom line, no one really wants to reduce their net worth, and no reasonable person really wants to slough off their tax responsibility onto their neighbors. After all:"Everybody has to pay taxes! Even businessmen that rob and steal and cheat from people everyday, even they have to pay taxes! (Same movie)
So if you want to reduce your taxes then get your city to spend less money. Ain't nothing you can do about mill rates and appraisals, it's just math. It may seem a waste of time, but at a minimum you're letting your representatives know that you're watching.
And get involved at a minium of reviewing, and voting for, your city's budget, and voting for candidates that have the best interests of the taxpayers at heart.
I've got other thoughts that I might add in here later. But for now I'm going to avoid being boring, and redundant, and repetitive, and repeating myself. Feel free to jump in the comments and lambast me, I can take it (I hope). At least help me correct anything I got wrong.
Hope this helps! - GA
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Epilogue: CT 2022 Motor Vehicle Mill Rate Limits
I noted above that I used the '20/21 budget numbers because it made the math a little easier. Reason is, in 2022 the CT State Legislature passed a law, effective July 1, that placed a maximum 32.46 mills that municipalities (cities, taxing districts) can charge for motor vehicle property taxes.
Hold on! You told me mill rate doesn't matter! Why are we talking about this??
LOL it doesn't matter! Except, well, in this unique situation it does. But, as you'll soon see, it probably won't any more (at least for Middletown).
Did you go check out Greenwich's mill rate versus Bridgeport's? If you did, you learned that tawny Greenwich has a mill rate of 11.59 while Bridgeport's is 43.45. It's primarily because the Grand List of Greenwich (the value of all their taxable property) is larger than Bridgeport's, as expected. The larger that number, the lower the mill rate, given similar budgets.
But you and I now know that number means nothing at all in terms of how much they'll pay in taxes; after all, 11.59 mills on a $2M home is a bigger tax bill than 43.45 mills on a $200,000 home.
The CT State Legislature knows this, too, and they used that fact as a tax hammer. Quite cleverly, I might add.
What they did was place a statewide 32.46 maximum mill rate on all motor vehicles. The reason? That number means that Greenwich vehicle owners, with a 11.59 mill rate, will be below the 32.46 limit and will still be charged full-rate property taxes on their Mercedes-Benz. Bridgeport and Hartford (and other high-mills cities) motorists will only pay at most 32.46 mills (instead of, for example, Bridgeport's 43.45) on their Camrys and Accords.
The motor vehicle owners in high-mills (lower Grand List) cities totally got a motor vehicle property tax break. Greenwich motor vehicle owners did not. Like I said, very clever. And it shows the Legislature understands the mill rate's vagaries.
Of course, "there's no such thing as a free lunch" so unless the cities reduce their budget, that shortfall will be placed on real estate owners (and, vicariously, renters). (Thanks, Milton, for the quote. Well, actually Heinlein but now we're being picky.)
To their credit, the Legislature reimbursed the cities and districts for those revenue shortfalls with State grants, so in the end this rate cap was a State handout to voters that live in higher-mills (read: lots of voters) districts (or is that me just being cynical?) Where that State grant money came from is anyone's guess -- I'm not gonna spend time swimming (drowning?) through the State's budget docs -- but ultimately those grant reimbursements fall upon the shoulders of all State taxpayers.
Anyway. Where this matters to Middletown is that our mill rate in '21/22 was 35.70. That meant property owners paid 35.7 mills on real estate but only 32.46 on motor vehicles. And because our three fire districts had nothing left after the City got its first 32.46 cut, residents did not pay any fire property taxes at all on motor vehicles. All four districts (City budget, City Fire, Westfield Fire, and South Fire) received that lost property tax revenue back from the State via grants (how long could/will the State keep that up before just saying, "sorry nope, no more grants"?)
But budget year 2022/2023 is where it'll get interesting. Remember our the discussions about how we expect the Grand List to increase due to re-appraisals? From an extremely informal and very small sample of spot-checks of random properties, I see the city's appraisals went up around 40-45% on average (we'll know for sure when the dust settles and we see the new Grand List, due in February.) If that holds true - and please check my math - then, assuming the budget holds steady as before then the City's mill rate will decrease about 28.5% to around 25.5 mills (again, assuming a stable budget). If that happens then it means that even with the 32.46 mills limit in place, residents will again be paying full city and fire district taxes on their motor vehicles.
Which will result in an overall out-of-pocket tax increase for Middletown motor vehicle owners. And a bit less for real estate owners (and vicariously, renters?)
Which will cause another mini-panic (especially for those who may rent their homes and didn't get a direct fire tax bill last year for their cars).
[...sigh...]
Let's see what February brings...
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Terms and math (hey, no eye rolling!)
Property Taxes = your fair share of the costs of running your city government
Appraised Value = the value that someone (or someones) has determined your property is worth
Assessed Value = Appraised Value times 0.70 (or whatever your city does)
Adjusted Grand List = the aggregate property value, minus exemptions, that we use for our tax calculations
Expenditure Budget = what your city has determined it needs for this year's operations
Revenue Budget = what your city expects to receive in revenues, including property taxes
Mill Rate = 1000 x (Expenditure Budget - all "other" revenue) / (Adjusted Grand List)
Taxes owed = Your Assessed Value times the Mill Rate
How do I lower my property taxes? Get your city to spend less money!
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Links
Middletown CT Mill Rates (remember, don't focus on these numbers!)
Middletown CT 2020/2021 Expenditure Budget
Middletown CT 2020/2021 Revenue Budget
Middletown CT Proposed 2022/2023 Expenditure Budget (here's where your attention should be)
Middletown CT all prior budgets
Middletown CT Housing and Property Information (where you can look up your appraisal and assessment)
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