Millage Rate

A tax rate whose value is based on the market value of a property

What is a Millage Rate?

A millage rate is a numerical multiplier attached to the value of a property and is used to calculate the local property taxes. It represents a dollar per thousand of a property’s assessed value. The product of the total taxable value of the property and the millage rate is compiled separately to arrive at the amount of property taxes.

 

Millage Rate

 

The word “millage” is derived from the Latin word “millesimum,” denoted 1/1000 or thousandth. A millage rate can also be called an effective property tax rate or mill rate. Different government jurisdictions impose their own millage rates, which are applied when calculating the property tax. For example, school taxes are calculated using millage rates derived from the total property value within the boundaries of school districts.

 

Summary

  • A millage rate is a tax rate whose value is based on the market value of a property and is used for calculating local property taxes.
  • Local governments impose millage rates by deriving them from the approximated value of the property.
  • The service level determines the millage rate in a municipality, and each property owner is levied accordingly. 

 

Understanding Millage Rates

Millage rates are imposed by local governments, either on an annual basis or at the time of real estate estimate. The property taxes are derived from the estimated value of the property, including the structure and the land. Millage rates are commonly applied on the property deeds.

Some local governments use mill rate and millage rate interchangeably to mean property rate. By definition, one mill is equivalent to $1 owed per $1,000 (one-thousandth of a dollar).

Millage rates are mathematically expressed as %0. It means that 1%0 represents one part per thousandth and can also be expressed as 0.1%. Thus, 45 mills are equal to $45 per every $1,000 of the estimated property value. Local governments appoint assessors to evaluate the value of the property periodically on their behalf.

 

Millage Rate - Formula

 

Sources of Millage Rates

The level of service that a property requires from a city or municipality determines the millage rate. A certain amount of tax millage is levied on each public service offered to property owners. The total tax liability of a property is calculated by combining millage rates from several taxing entities.

Tax authorities include school boards, municipalities, counties, emergency services, and community colleges. Note that the millage rate elasticity with respect to the tax base varies across municipalities located in different metropolitan areas.

Property size is an important element in the municipalities’ decision to raise their millage rate. Large cites practice larger millage rate offsets, and the fear of capital flight moderates the millage rate increase in response to tax base increases.

 

How to Calculate Millage Rates

When calculating the homeowner’s property tax, we consider the total imposed millage rate and the assessed value of the property. The assessed value of the property is the ratio of its present market value. Tax authorities in some municipalities use the assessment of tax as 100% of the market value.

On the other hand, the tax assessed value can be as low as 10% below the property’s present market value in other locations. Since the municipality imposes mills, millage rate also impacts the assessed tax of a property.

For example, consider a home property whose present market value is $350,000 in an area with 20% of the market value as the tax-assessed value. The homeowner will incur a tax base of $70,000 (20/100 * $350,000).

Suppose the homeowner’s total millage rate is 80 mills (80/1000), which implies that for every $1,000 assessed value, the homeowner owes $80 in property taxes. Therefore, the homeowner’s total property due is $5,600 ($70,000 * 0.08).

The value of the millage rate may be a combination of various tax authorities. For example, the emergency service district levies (20) mills, the county imposes (25) mills, the school board levies (10) mills, the local community college imposes (15) mills, and the municipality levies (10) mills, with the total rates being 80 mills.

 

Adjustments of the Millage Rates

From 1995 to 2005, millage rates were mixed across different local governments, but rates for all municipalities fell between 2000 and 2007. In the period between 2007 and 2011, the millage rate increased. The upward and downward swings reflect the fact that local governments adjust their millage rates to stabilize the total revenues that properties generate.

The tax bases’ dramatic swings are courtesy of boom and bust of the mortgage market between 2000 and 2008. The market scenario notably raised the per capita tax bases. However, the slump that followed, along with the Great Recession, led to the steepest falls in real per capita tax, ranging from 27% to 38% between 2007 and 2011.

All the local governments responded to the fiscal stresses by raising millage rates to cut capital expenditure. The choice to cut the capital expenditure in response to reduce loss in the tax base reflects the local governments’ large capital budgets and aging public infrastructure.

 

Related Readings

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To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Appraisal
  • Cost Approach (Real Estate)
  • Depreciation Recapture
  • Market Value vs Investment Value

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