This commentary was originally published in MySanAntonio.com on Sept. 5, 2014.
Von Ormy is a small town south of San Antonio that most Texans probably haven't heard of. But city officials have a big idea that could change all that.
Last month, it was announced that Von Ormy likely will become the first municipality in Bexar County to eliminate its property tax and shift to a consumption-based tax system.
By proposing to eliminate the property tax, Von Ormy officials are not only establishing a pro-growth benchmark for other cities to follow but also challenging Texans to question the need for a property tax in the first place. The implications could have an effect on tax policy for years to come.
How did Von Ormy get here?
After incorporating in 2008 to provide basic city services to this underserved community of South Bexar County residents, the nascent city set a property tax rate of 39 cents per $100 valuation, based on an average of surrounding communities. While it was sufficient for its needs, low property valuations — and the deepening recession of 2008 — meant a limited property tax revenue stream going into city coffers.
That was when Von Ormy did something extraordinary — not only did it provide services within its tax rate, the city was so efficient that it cut taxes the next year. Then city leaders kept doing it. Every year that Von Ormy has existed, they've cut the property tax rate by at least 10 percent using surplus sales tax revenue.
Lower taxes, no fees and few regulations have encouraged strong local growth. As a result of fostering a pro-growth economic environment, Von Ormy's revenues have exploded, with more than a 30 percent increase expected in the coming fiscal year.
While you won't find many cities abolishing their property taxes, it is hardly a radical idea. It actually makes a lot of sense.
This is because Von Ormy refuses to saddle future generations with debt to finance immediate needs. Instead, the city is paying for projects with cash. This common-sense financial stewardship is what many families do, of course, but governments often lean heavily on their credit cards — i.e., bonds. So much so that Texas' local government debt has now exceeded $328 billion in principal and interest — some $12,400 for every Texan.
All this debt must be paid back somehow. Local government property-tax breakdowns will often show both the “maintenance and operation” rate and the “interest and sinking” or “debt service” rate — that's the payment on bond debt. Bonds are backed by ad valorem tax revenue, which forces governments to dedicate part of their rate to their payment. As a result, the more debt a city has, the higher its property tax rate must be. Von Ormy's residents don't have this problem with their city.
Some might wonder if such measures mean meager city services. In fact, they do not. Among other things, Von Ormy's budget this year proposes building a new police station and city park, for which the city will pay cash and incur no debt.
If nothing else, the Von Ormy model illustrates that cities that focus on lower taxation and less debt, and seek greater efficiency in their operations are able to thrive and provide city services.
For Texas' sake, let's hope Von Ormy's ideas find fans outside of its city limits.
Jess Fields is senior policy analyst with the Center for Local Governance at the Texas Public Policy Foundation.