A property tax that is based on a property’s assessed value
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The mill levy/rate is a form of a property tax that is based on a property’s assessed value. The mill levy’s traditionally been, and continues to be, expressed in “mills.” A mill is equal to $1 for each $1,000 in assessed property value (derived from the Latin word “mil,” meaning 1,000).
The mill levy is calculated by determining how much revenue each jurisdiction will require from taxes to fund its budget for public services. Public services may include things such as public schools, maintaining parks, and continuing other jurisdiction services.
When a jurisdiction generates a figure for its required revenue, it divides the revenue by the total taxable property within an area. The rate of each jurisdiction is then added together to find the mill levy for the entire area.
How Does a Mill Levy Work?
There are usually several public service authorities that exist within a given tax jurisdiction, including school, county, and city services. The mill levy tax is expressed in mills, which is the equivalent of taxing $1 for each $1,000 of assessed property value. The mills in a jurisdiction determine how much property taxes are charged in a certain tax jurisdiction.
Each year, tax departments and public service authorities develop the following:
1. Revenue required by the jurisdiction
The process will include understanding the needs of the tax jurisdiction for the upcoming tax year. The needs are usually calculated based on public service budgets and any deficit spending that jurisdiction is required to recover from previous years.
2. Effective mill levy
After calculating the required revenue figure, the jurisdiction must determine the amount of tax it requires to raise to meet the figure. Usually speaking, a large source of tax revenue for a jurisdiction is property tax, and the jurisdiction determines a proportionate rate (the mill levy) that is required to raise the revenue (i.e., if you own a more expensive property, you are expected to pay more and vice versa).
To determine the mill levy, most tax jurisdictions use a percentage formula (as shown below in “mill levy formulas”). The percentage is known as the assessment ratio – the assessment ratio determines the property value for the mill levy.
The determination and calculation of a mill levy are separated into two components – determining the mill levy and calculating the property tax.
1. Determining the mill levy
During the budgeting process each year, a tax jurisdiction must figure out how much revenue is required to operate. From the amount, the jurisdiction will usually subtract known revenue streams, such as grants, licenses, and permits. The remainder must be raised in tax revenue.
2. Calculating property tax
After assessing the revenue required to operate, a jurisdiction will need to apply the mill rate to each individual property. Since the mill levy is constant, the more expensive the assessed property, the more a taxpayer will need to pay.
The process is usually done each tax year in a specific jurisdiction due to changes in required funding or economic circumstances. It is worth noting that if any property tax exemptions exist in a jurisdiction (for example, a farm dwelling in a rural area is provided partial relief), they are subtracted from the assessed value to find the taxable property amount. It is the true value that the mill levy is applied to.
Payment of Mill Levy
The mill levy is paid to a single tax department, which is usually the tax department of a country or city where the property is located. After collection of the mill levy, the tax department will distribute the funds among several authorities, which are entities that are responsible for a service, such as public schools, so they can use the funds accordingly.
The mill levy is taxed once (i.e. a single payment), but sometimes a detailed tax bill is provided to taxpayers that includes the number of mills of tax that are set aside for each public authority to use at their discretion. By using the detailed bill, the tax department creates transparency on the use of taxes within a tax jurisdiction.
Let us assume we live in a tax jurisdiction with the following characteristics:
Required revenue = $1 billion
Taxable property value = $10 billion
Known revenue streams = $0
As such, the effective mill levy would be equal to 100 mills (0.1, or $100 per $1,000 in assessed value).
Now, let us say you own a house with a property value of $5 million and without available property tax exemptions. It would follow that:
As such, you would owe $500,000 in property taxes for that tax year.
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