What Is Effective Tax Rate?

The actual percentage of a property's market value paid in property taxes annually, accounting for assessment ratios and exemptions.

Detailed Explanation

The effective tax rate is the simplest way to compare property tax burdens across states and counties. It is calculated by dividing the total property tax paid by the property's market value. For example, if your home is worth $300,000 and you pay $6,000 in property taxes, your effective rate is 2.0%. This number cuts through the complexity of different assessment ratios and millage rates to give you one clear figure: what percentage of your home's actual value goes to property taxes each year. The effective rate differs from the nominal or stated tax rate because it accounts for the assessment ratio. A state with a 50% assessment ratio and a 4% tax rate on assessed value has a 2% effective rate (50% x 4% = 2%). A state with 100% assessment ratio and a 2% rate also has a 2% effective rate. The effective rate also helps you estimate how much an overassessment costs you. If your effective rate is 1.5% and your home is overassessed by $40,000 in market value terms, you are overpaying about $600 per year ($40,000 x 1.5%). Effective rates vary enormously across the country, from under 0.3% in Hawaii to over 2.2% in New Jersey and Illinois. Within a single state, rates can vary significantly by county due to differences in local school funding, municipal services, and special district taxes.

How It Varies by State

New Jersey2.23% average effective rate

Highest in the nation. High rates driven by local school funding. Significant variation by municipality.

Illinois2.07% average effective rate

Second highest. Cook County rates can exceed 2.5%. Driven by school districts and municipal pension obligations.

Hawaii0.27% average effective rate

Lowest in the nation. Lower rates partially offset by extremely high property values.

Texas1.60% average effective rate

Higher than average because Texas has no state income tax. Property tax is the primary revenue source for local government.

Alabama0.39% average effective rate

Among the lowest. Low assessment ratios (10% for homesteaded residential) keep effective rates down despite moderate millage.

Common Misconceptions

Myth:The tax rate on my bill is the effective rate

Reality:The rate on your bill is usually the nominal rate applied to assessed value. The effective rate accounts for the assessment ratio and is expressed as a percentage of full market value.

Myth:States with low effective rates are always cheaper to live in

Reality:Low property tax rates may be offset by higher state income taxes, sales taxes, or fewer public services. Total tax burden is what matters.

Myth:The effective rate is fixed and cannot change

Reality:Effective rates change annually as local governments adjust their budgets and millage rates. They also change relative to your property if your assessment increases faster than the rate decreases.

Impact on Your Tax Bill

If you are comparing two potential homes, one in New Jersey ($400,000 value, 2.23% effective rate = $8,920/year) and one in Tennessee ($400,000 value, 0.66% effective rate = $2,640/year), the property tax difference alone is $6,280 per year. Over 10 years, that is $62,800.

Property Tax Assessment Ratios by State: Complete 2026 Guide

Every state's property tax assessment ratio for 2026 — from 4% (South Carolina) to 100% (Texas, California). How to use your ratio in an appeal with worked examples.

How to Read Your Property Tax Bill

Learn how to read your property tax bill line by line: assessed value, millage rate, exemptions, taxing authorities, and how to spot errors that cost you money.

Related Terms

Assessment Ratio Millage Rate

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