What is the difference between a tax rate and an effective tax rate?

The difference between a tax rate and an effective tax rate lies in the way taxes are calculated. Tax rate is the percentage of a property’s value that must be paid in taxes and is set by the Washington State Legislature. The tax rate is established annually and each county or locality must use the same tax rate established by the Legislature. The effective tax rate is the amount of property tax liability calculated based on the formula required by the Department of Revenue. This formula includes the tax rate established by the legislature plus certain other factors such as the cost of living index or exemptions. The effective tax rate can differ from the tax rate if certain exemptions are allowed by local governments or the taxpayer. For example, in Washington, a property owner may be subject to a 3% tax rate, but the effective tax rate may be 2.6% due to some exemptions that are allowed. The effective tax rate is used to calculate the property owner’s tax liability and is usually lower than the tax rate. Therefore, the tax rate is the percentage the state sets, while the effective tax rate is the actual amount that the property owner has to pay.

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