A local county government experiences an increase in spending needs. To help pay

Question

A local county government experiences an increase in spending needs. To help pay for these, it decides to permanently increase annual mill rates from $10 to $25. Instead of making the increase all in one year, it decides to increase the rate from $10 to $15 in the first year, and then from $15 to $25 in the second year. The mill rate is to remain at $25 each year thereafter. The Uys own a house in this county valued at $500,000 before the change in property tax policy. Assume interest rates are 10%.

a) What is the value of the Uys’ house after the change in property tax policy under 100% capitalization? Explain your calculation carefully.

b) Why does this capitalization occur? What factors lead to 100% capitalization versus lower rates of capitalization?

Explanation / Answer

The mill rate, also referred to as the millage rate, is a figure representing the amount per $1,000 of the assessed value of property, which is used to calculate the amount of property tax.

Home valued at $500,000 before the change in property tax. Therefore home will only be impacted due to changes in property taxes.

Additional Property Taxes:

Year 1: $500,000 * (15-10) /1000 = $ 2,500

from Year 2 : $500,000 * (25-10) /1000 = $ 7,500

Prevent Value to Property Taxes = (2500 + 7500/10%) / 1.1 = $77,272.

Value of the Uys’ houseafter the change in property tax policy = $500,000 - $77,272 = $422,727

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