Cities, counties, school districts, and many other local taxing districts rely on property taxes to fund their operations. For a full review of the details of property assessment and taxation in Missouri, please read Show-Me Institute Policy Study Number 28, “Homes, Taxes and Choices: A Review of Real Estate Assessment and Property Taxation in Missouri.” In Missouri, the local assessor assigns a value to taxable property every two years. Local governments then use those values to set their property tax rates. The rate and value are combined to calculate the annual property tax bill sent out each year to homeowners and other types of property owners. Those property taxes are the primary source of funding for local government authorities in Missouri.
Property taxation levels — along with the quality of public services they support — affect the value of houses and other property through a process known as capitalization. All else being equal, a house with a higher property tax bill will sell for less than a similar house with a lower tax rate because the buyer will include the cost of higher future taxes in the offer. On the other hand, people are willing to pay more for a home in a good school district than for the same home in a poor school district. Both cases are examples of capitalization, and the purpose of this case study is to examine its effects on housing prices in the municipality of Richmond Heights, Missouri.
There are two categories of taxable property in Missouri: “real” and “personal.” Real property is land and buildings. Personal property is vehicles and equipment. Real property is subdivided into three subclasses: agricultural, residential, and commercial. Both the method of assessing real property and the taxation levels levied upon it depend on the subclass.
The assessment of real property is divided into the value of the land itself, and the value of the improvements (e.g. the house or office building) on the land. The values of the land and improvements are added together to form the appraised value. An assessment ratio is then applied to the appraised value to determine the assessed, or taxable, value. The assessment ratio is the multiplier applied to the three subclasses of real property. The ratios are 32 percent for commercial property, 19 percent for residential property, and 12 percent for agricultural property.
However, Missouri law dictates that both the assessment ratios and the tax rates be uniform for the land and the improvement. For example, take two neighboring homes, each with a total appraised value of $200,000. If one has land valued at $80,000 and a house valued at $120,000, and the other has land valued at $60,000 and a house valued at $140,000, the total taxes paid will still be exactly the same. Please see Table 1 in the appendix for an example of how various appraised values translate first to assessments and then to tax dollars.