Buying property is the largest purchase most Texans make. There should be clear property rights so they can use land as they desire. Although property taxes force Texans to pay rent to the government forever (meaning we can never truly own our own property, which is a pretty good argument for eliminating those taxes), other restrictions should be eliminated.
Texas law provides certain property tax exemptions for agricultural land. In theory, of course, all special exemptions should be eliminated because they shift the burden from some property owners to others. Yet making any change in the current law should be made in a manner that does the least harm to property owners.
Under current law, if a Texan decides to change the use of his or her land from agricultural uses to something else, that land holder must pay a substantial penalty. This is often called the “rollback rate”—but with this rate being easily confused with revenue increases discussed in Senate Bill 2 and House Bill 2, let’s call it the “lookback tax.”
According to Section 23.55 (a) of the Texas Property Tax Code (1-d-1 land), the lookback tax is equal to the difference between the taxes on the land for the five years before the change of use, the tax that would have been on the land based on the market value for those years, and interest calculated at a 7 percent annual rate for those years.
This can quickly add up to a large amount—all resulting from just deciding to do something different with your own property. This is not only an inefficient way to tax, but it also reduces the property rights associated with the land.
House Bill 794 this session would eliminate the lookback tax for agricultural purposes. Again, the property tax exemption for agricultural land picks winners and losers in the tax code and shouldn’t exist, but until we have comprehensive property tax reform, this lookback tax should be eliminated.
Property taxes are a highly regressive tax, as many low-income people are hit hard. Many are unable to afford their first home, pay their property taxes that compound over time, or keep their home—even after they’ve paid off their mortgage.
Again, the best way to eliminate the lookback tax and the unfortunate situation of Texans being forced to rent forever is to end property taxes.
Fortunately, the Foundation has a plan to eliminate property taxes starting with the maintenance and operations school district property tax. By simply limiting the growth of government spending and using taxpayer dollars collected at the state level to cut this property tax, the Texas Legislature could eliminate nearly half of the property tax in about a decade.
HB 794 is a common-sense fix to an unnecessary burden. If we are to improve the Texas Model that has made the Lone Star State more successful than similarly sized states for decades, the Legislature should make similar changes to allow Texans’ land use discretion, so that more money is kept in the productive private sector. That’s how to help people prosper.