When it comes to real estate taxes, formulas are complicated, hard to understand and never seem fair. (Dreamstime)

Q: I live in a state where property taxes are calculated differently by each town. My question is why is the calculation a three-step approach rather than a two-step approach?

Let me illustrate my understanding and hopefully you can explain why this current method is used. I do understand that the end game is to collect enough money to pay for the town budget, but on the surface it would appear that the calculation could be simplified and provide state residents with an easier way to compare property taxes by town.

As I understand it, the first step is to appraise the home or property value, which is usually done by the town’s assessor office or a third party hired by the town assessor. I have no question concerning this step. The second step is to apply a percent to the assessed value. In our state the norm is around 70 percent, but in the cities it can be as low as 40 percent. The next step is to apply the mill rate, which ranges from 30 to 40 percent but can get as high as 70 percent.

These last two steps seem like overkill, unless there is a logical reason for the two rates. Why don't the towns just apply one rate to the appraised value and be done with it?

A: Your question opens up a big can of worms. The good news is you seem to have a pretty good understanding of the way real estate taxes are billed where you live, and the system you describe is used in many places in a similar manner to yours. We’re not going to pretend that any method of real estate taxes is truly understandable or even fair (that’s where politics come into play), but you have to start somewhere.

Let’s say a municipality needs \$10 million for all of its needs, and we assume that there are 1,000 homes in that municipality. On average each home in that municipality would pay about \$10,000 in real estate taxes. Now some homes are worth more than others, and this is where the assessed value, appraised value or home value comes into play.

As you suggested, in the ideal world, you take the value of a home and then use that value to determine how much in taxes that home should pay to the municipality. The mill rate or tax rate would then be used with the assessed value to come up with the amount of taxes for the home. But things can't be that simple.

Some states will use the full assessed value to compute what a homeowner will pay in real estate taxes while other places will use a percentage of that assessed value. This difference can make the process of understanding real estate taxes quite complicated. So in one town, the tax bill may be based on the full assessed value of the home and in another it can be based on 10 percent of the value of the home.

To complicate things further, where different towns use different percentages of the assessed value, states may require an additional computation to “level” the way the assessed value affects the property tax bills. We say it may “level” the method but it may not make it fairer or lower your real estate taxes.

Some states try to equalize what homeowners pay across the state to a certain degree. In other situations, you have school districts, park districts, library districts, sanitary districts, water districts, flood control districts and other components that go into a tax bill. You also have different types of properties that pay real estate taxes differently. You might have agricultural land, manufacturing facilities, retail establishments, restaurants, offices, single-family homes, condominiums, townhouses, hospitals, schools, churches, high-rises, low-rises, skyscrapers and many other types of properties. Each of these properties may pay real estate taxes differently.

A home located in one town may have to pay for certain benefits but not others. You noted that you see different tax rates from one place to another. Say one town has no fire and police department and no water and sewer facilities. That town’s real estate taxes might be lower than the town next door that has those facilities. Real estate taxes are way too complicated for a simple formula.

Yes, the value of a home has a lot to do with the tax or mill rate that goes into the taxes paid by that home. But to get to that tax or mill rate, you might have a whole list of governmental entities and bodies that need money. So one place could have a low tax or mill rate, but in the town next door the tax or mill rate could be much higher.

We’ve simplified the method used to compute real estate taxes, and some states have even more complicated tax bills that take into account whether the home is a primary residence or a second home and whether you are a resident of a state and pay taxes in that state. Then, to complicate things further, the tax bills may be split to take into account any school taxes.

The one thing we know for sure is that the formulas are complicated, hard to understand and never seem fair. And don’t get us started on how assessors or appraisers come up with the way they compute the value of a home. Sometimes there’s no rhyme or reason to the way that is done either. Sorry we can’t enlighten you more on this issue. Thanks for the question.

Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.