Which States Have the Lowest Property Taxes?

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If you’re looking to own a property in the US, you’ll have to pay property taxes. Property taxes are just an unavoidable part of real estate. Fortunately, property taxes vary by state, so you have some control over how much property tax you have to pay. Property taxes even vary by county, but we’ll evaluate property taxes by state to help you decide where to purchase a home. Nationwide, Americans pay an average of $2,471 in property taxes each year. However, this number can vary significantly between states as residents of Alabama pay $587 annually and residents of New Jersey pay $8,362 annually. The state you choose could have a significant impact on the amount of property tax you pay each year.

How Are Property Taxes Calculated?

To understand why property taxes vary by state so much, it’s important to first understand the property tax calculation. The annual property tax amount for each homeowner is calculated by multiplying some millage rate by the property value. The millage rate is, also known as the property tax rate, is a percentage tax rate found using the state’s average mill levy. Each county has different mill levies, which is a flat dollar tax amount paid for each $1,000 in property value. Property taxes apply proportionately, which means to calculate your total tax amount for the year, you can apply the millage rate indiscriminately. For example, if the millage rate is 1.8% in your state and you have a $500,000 home, your total property tax would be $9,000. 

This is important because it means that when considering property taxes, you have to equally pay attention to the property tax rate and the property value. The reason New Jersey has the highest property tax in the US by far is that it has one of the highest millage rates and one of the highest median home values. These two factors contribute to an average property tax over 30% higher than the next highest state, Connecticut.

The Lowest Property Taxes

Generally, states with higher real estate prices will charge higher property tax rates. This is because property taxes are used to fund public services such as schools and hospitals. Counties with more public services need more tax revenue to keep these services operational. Unfortunately, this means that if you’re planning on paying a lower property tax, you may have less access to these public services.

There are also two ways to categorize lower taxes. While we have been looking at total property taxes paid, you should be interested in the millage rate or property tax rate. This way, you can compare your total property tax without factoring in the home price. That being said, the three lowest property tax rates belong to Hawaii at 0.28%, Alabama at 0.41%, and Colorado at 0.51%. These property taxes are extremely low especially compared to states with high property taxes. For example, New Jersey’s property tax rate of 2.49% is about 5x as large as Colorado and about 9x as large as Hawaii.

Hawaii has the lowest property tax rate because many homeowners in Hawaii County take advantage of a lower tax rate if they qualify for the homeowner exemption. This is because Hawaii wants to encourage local homeowners instead of letting their real estate market get inflated by tourists. Hawaii also charges higher income taxes because many of its homeowners are retirees with fixed incomes. Through these tools, the Hawaii government can keep housing affordable for a large portion of their population.

How Much Should You Care?

While property tax rates are worth considering, many homes in the same state sell for similar prices. The property tax rate determines how much property tax you pay in proportion to the property value, but ultimately, you will be paying a dollar value. If you are concerned about property taxes, you should look to buy a home at a lower price. While it’s worth avoiding extremely high property tax rates like Illinois or New Jersey, most state property taxes are within 1% of each other.

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