A local government can use either a levy or a bond to collect revenue to fund a project, such as building new schools in an area. Voters may have to approve a new bond or levy.
While a levy and a bond may appear the same from the outside, they operate in different ways. A levy is a direct tax on each property in the area. A municipal bond is a financial instrument that the government issues that requires the government to make interest payments to the bond investors in exchange for an upfront payment.
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Bond and Levy Tax Assessment
A levy essentially is a property tax, and only property owners have to pay for a levy. The local government may use a variety of methods to determine the levy amount, the most common of which are the property's fair market value or the value that its assessors calculate using field research. Some local governments use a combination of both values to determine what each property is worth. The tax itself is then charged as a percentage of the value of each property to fund the levy.
Bonds are different. Here, the municipality can use any source of funds to pay bond investors, such as sales taxes, fines such as speeding tickets, park admission fees and parking meter revenue. As such, they are generally regarded as more flexible instruments for raising much-needed cash. As the Tax Policy Center reports, cities, townships and school districts issue bonds primarily to pay for large and expensive and capital projects.
Consider also: What are Property Taxes?
Both Require Voter Approval
A bond and a levy can have different approval requirements although fundamentally, they both require voter approval. For example, King County, Washington establishes stricter requirements to pass a bond measure than it requires for a levy measure. Taxpayers are more likely to approve a bond measure because they don't immediately have to pay back all of the interest on the bond.
Using a Levy to Pay a Bond
The government can establish a levy to repay a bond. This bond levy funds a specific project, such as building a new city hall, and expires automatically when the project is complete. A renewal levy extends the duration of an existing levy that is about to expire, so property owners will continue to pay the same levy rate and will not notice a tax increase.
A replacement levy extends an existing levy and requires the assessor to reassess each property. The replacement levy will bring in more taxes if property value increases in the area, but it will bring in less revenue if property value declines.
Impact of a Property Levy
A levy gives a local government a claim on a specific property; and if the taxpayer does not repay the levy, the government can foreclose on the taxpayer's house and sell it to pay off the levy. If the taxpayer sells his house, the new homeowner will have to make the future levy payments. Existing levies can make properties in an area more difficult to sell.