What’s Going on With the Tax Rate?
There seems to be a great deal of confusion regarding the recent decrease in the tax rate and the increase in tax bills. “What is going on with my taxes?! They said the rate went down but my bill went up. How is that possible?” As I have been meeting residents across the ward many have asked me about their tax bill increasing. I’d like to put my background in finance and break down this scenario to better explain the mathematics and clarify any confusion that is out there.
To begin, there are 3 components to the equation: the tax rate, the assessed value and the tax burden required to cover the budget. The city needs a certain amount of tax dollars to maintain the budget to run the city. These tax dollars come from a formula that involves the tax rate and assessed property values.
For simplicity and for the sake of example, let’s say the city needs $2000 dollars and there is only one home with an assessed value of $100,000. To attain the tax revenue of $2000 needed to cover the budget, the city would need to charge a tax rate of 2% (.02 x 100,000 = $2000).
Now, let’s say the assessed value of the home increased and what was once a $100,000 home is now assessed at $200,000. This would mathematically allow the city to lower the tax rate to 1% to cover the amount needed for the budget. (.01 x 200,000 = $2000). Because the assessed value has increased, it becomes possible to decrease the tax rate and maintain the tax bill at an amount $2000.
“So if the rate dropped and my assessed value increased, why did my bill increase?” Residents are seeing an increase in their bill despite a lower tax rate due to the fact that the amount needed for the budget has increased. For example, if the assessed value of my home increased from $100,000 to $200,000 and my tax rate decreased from 2% to 1.5%, then my tax rate still goes down half a percent but my actual tax bill that I pay goes up $1000 (.015 x $200,000 = $3000). In this scenario, the resident would experience a tax rate decrease with a simultaneous increase to their bill. The tax rate can be decrease here because it is multiplied by an increase in the assessed value. This results in the homeowner experiencing a 50% increase in their bill while simultaneously experiencing a .5% decrease in their tax rate. This is obviously an example and our tax base scales much larger than one home and a budget of just two thousand dollars, but I hope it helps clarify any confusion.
So now that we understand how it works mathematically, what can the city do to help residents?
There are several strategies the city may pursue to achieve this goal:
Option 1: The city could reduce the budget side of the equation which would result a lower tax burden. This would result in the need for a lesser tax burden but could adversely affect our city services.
Option 2: The city could increase the amount of residential development, therefore adding more volume to the tax base. While this might seem like a good idea to some, I believe this would have adverse effects given a correlation to increase the tax burden required for the budget as more citizens would increase demand on city services.
Option 3, and my choice: Increase Commercial Development. The tax base is comprised of residential and commercial properties yet commercial properties typically demand less of city services (for example, businesses do not have children that utilize the school system). Commercial tax rates are also higher than residential which may allow us to give all homeowners not just a lower tax rate, but a tax bill that is lower than what they are paying now. I believe the Necco and Wonderland sites in Ward 5 are prime opportunities to achieve this and if elected as your next Ward 5 Councilor, I will pursue making this happen.
Eric Lampedecchio, MSOL, Candidate for Ward 5 City Councilor