This commentary, by The Honorable Talmadge Heflin and Mary Katherine McNabb, originally appeared in Breitbart Texas on August 27, 2015.
Texans benefit from living in one of only nine states without a personal income tax. However, Texas’ cumbersome property tax system warrants concern as it essentially functions as a replacement to the income tax and harms property owners.
Texas’ property tax system is an enormous burden. The Tax Foundation recently ranks the 1.9 percent mean effective property tax rate as the 6th highest and the overall burden the 14th highest nationwide.
There are two aspects to one’s property tax liability: the appraised property value and the tax rates set by local jurisdictions. Most homeowners identify the tax rate as a culprit of their rising property tax bill, but often the higher bill is from the subjective appraised value—which is typically a good thing but leads to a higher property tax liability. This is the case in Travis County where property values increased by 11 percent so far in 2015.
The Texas Comptroller’s website provides an explanation of the appraisal process that must assess properties at least once every three years. First, each of the 254 Texas appraisal districts determines which properties are taxable within the county boundaries and then their value.
Property value is determined based on individual characteristics that influence a property’s market value. Once the county puts together a list of taxable properties, a mass appraisal process is typically used to determine values. Appraisal districts then classify properties based on factors such as size, use, and construction type.
There are three types of approaches to appraising property.
The comparison approach is when the value is determined based on sales prices of similar properties. The income approach bases value on income and expense data used to find the present worth of future benefits. The cost approach determines the value by what it would cost to replace or improve property with one of equal utility.
There is some ambiguity with the subjective nature of how properties are appraised. Often, the appraised value of a property increases without the homeowner making changes to their property. Rather, surrounding properties, or even similar properties not in the immediate area, will be improved resulting in other owners having their property’s value increase forcing them to pay higher property taxes from no action of their own.
Exemptions are one method used to deliver some relief. Typically, they are only partial and require an application for exempting either a percentage of the property’s value or a fixed dollar amount from the property value.
The residence homestead exemption applies when the owner uses the property as a permanent residence. Any taxing jurisdiction has the ability to offer exemptions up to 20 percent of the property’s value. The statewide school district homestead exemption has been $15,000 since 1997. This was increased by $10,000 during the 2015 Legislative Session and will be on the November ballot for voters to decide.
Another exemption of $10,000 is for those living in a residence age 65 or older or disabled persons. Veterans also receive a state-mandated exemption, including widowed spouses and children or disabled veterans, which may receive total exemption. Finally, charitable organizations and businesses can apply for different types of exemptions.
We are in favor of reducing the burden of property taxes. Though these exemptions sound like a free lunch, there’s a catch: if exemptions increase, so can the tax rate and appraised value erasing any savings in a short period. This happened after the rates were bid down in 2006 when most homeowners noticed a tax break for at most two years.
In other words, homestead exemptions are a Band-Aid for a system that needs major surgery.
Increases in property taxes mean two things: first, there’s less money available for individuals to voluntarily determine whether to save or spend, and second, that property owners actually lack the ability to own their property because they rent from the government forever.
Though not a bad deal in the short run, increasing the homestead exemption will not eliminate the rising property tax burden on Texans. Structural changes, such as reforming the appraisal review process and strengthening the local rollback provision, are necessary for more effective limits to out-of-control property tax bills.
Long term, Texans would be best served by abolishing local property taxes and replacing them with a reformed sales tax. This would remove the power of appraisal districts to subjectively determine property values and from local taxing jurisdictions to set property tax rates to maximize their revenue.
Such a bold move would let property owners have the opportunity to meet their desires as they see fit rather than be forced to pay property taxes, and more importantly, allow Texans a chance to finally own their home.
The Honorable Talmadge Heflin is Director of the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. In the 78th Session, Heflin served as chairman of the House Committee on Appropriations and navigated a $10 billion state budget shortfall through targeted spending cuts that allowed Texans to avoid a tax increase. He may be reached at [email protected].
Mary Katherine McNabb is a Research Associate in the Center for Fiscal Policy at the Texas Public Policy Foundation.