Real estate taxes: basic budget algebra

January 5, 2006 | Government, Property taxes, Real estate taxes

First in a series of unknown length


Just as government is a factory, so it is a business, in which receipts must match expenditures.  Nowhere is this more visible than at the local level. 


Sometimes it takes a Nobel prize-winning physicist to understand local budgeting


Denied normal income taxation (except in a few particular destination cities that play soak-the-business and soak-the-tourist), localities are thrown back on the one entirely local revenue source: real estate taxes.  They do this by calculating backwards:


Aggregate Real Estate Taxes, reverse-engineered


+ Budgeted expenses

– Ancillary income sources (fees, permits

= Aggregate Real Estate Tax Revenue Needed



“How much do we have to wring out of this to make ends meet?”


The key insight here is that aggregate real estate tax rates are set simply to cover the locality’s budget.  There is no ‘fair,’ ‘equitable,’ or ‘normal’ real estate tax rate.  It all depends on two things:


  • How much the locality wishes to spend
  • How much local voters are willing to tolerate as their individual tax burdens.


“How much city government can you afford?”


On what does a city spend its money?  (A quick search reveals two useful budgets, for Detroit and San Jose, although both of these treat schools separately.)  Aside from the invisible administrative load, mainly on locally visible services:


  • Police.
  • Fire protection.
  • Schools (although in many states like California, the state pays a large portion of school funding). 

Of these, the one whose budget fluctuates most dramatically with demography is the school system.  In the minds of local voters, the linkage is well established — property taxes pay for schools.


Imagine what it would cost if we had to pay teachers too!


Once that is done, localities then apportion the real estate taxes across the entire property inventory:


Millage Rates, reverse-engineered


Aggregate Real Estate Tax Revenue Needed

Total Assessed Value of All Property in the City



You’d think that once this is done, every piece of property pays the same millage rate — but you’d be wrong!  Just how wrong, and why, will be the subjects of future posts in this series.