Property taxes are one of the main sources of revenue for local governments, and they are typically based on the value of real estate owned by individuals and businesses. In Alabama, the state’s constitution protects property tax rates, which means that they are difficult to increase. This has resulted in Alabama having the lowest property tax rate in the nation, with the average Alabamian paying only $632 in property taxes in 2020.
While low property taxes may be good news for Alabama land and property owners, it can be challenging for local governments to raise enough revenue to fund essential services such as education, public safety, and infrastructure. As a result, local governments in Alabama are forced to turn to other sources of revenue, such as sales taxes, to make up for the shortfall.
The Negative Impact of Low Property Taxes in This State
Alabama is also known for having high sales taxes, with the state ranking first in the nation for local sales tax rates. According to a recent report by the Tax Foundation, the average combined state and local sales tax rate in Alabama is 9.22%, which is higher than the national average of 7.12%. Sales taxes in Alabama apply to most goods and services, including groceries, which is uncommon among states.
Despite these challenges, Alabama remains a relatively low-tax state overall. According to the same report by the Public Affairs Research Council of Alabama, the state ranked 50th out of 51 states and Washington D.C. in all taxes combined per capita in 2020, with only neighboring Tennessee having a lower tax burden.
How Alabama Calculates the Real Estate Property Taxes
All property owners in Alabama are subject to property taxes unless specifically exempted by law. Property taxes are governed by Chapters 7 through 9, Title 40, Code of Alabama 1975, as well as various provisions within the Alabama Constitution of 1901 and Alabama law. While these laws provide a means of generating revenue for the state, they also contain provisions that may be considered as industrial incentives.
The assessed value of real and taxable personal property in Alabama is fixed by Amendment 373 of the Constitution at 20% of its fair market value. For instance, a property with a fair market value of $1 million would have an assessed value of $200,000. The combined state and local millage rate would then be applied to the assessed value to calculate the property tax owed.
The state millage rate on both real and personal property is limited to 6.5 mills by Section 214 of the Constitution. The 6.5 mills comprise 3 mills for education, 1 mill for relief, and 2.5 mills for general use. One mill is equivalent to one tenth of one cent, or 0.001. Therefore, the state millage rate equates to a tax of $6.50 for every $1,000 of assessed value.
Here’s an example:
Fair market value x 20% x Millage Rate = Property Tax
$1,000,000 x 20% x .042 = $8,400
Take a look at the State of Alabama official revenues and taxes website here.