The locally administered and collected property tax is the primary tool the state has given counties to pay for the local services required by the federal and state governments (mandated services). Local property taxes also pay for the other local services expected and demanded by homeowners, businesses and other residents, services that directly affect the way Texans live their lives and raise their families and earn their livings (optional services).
Together mandated and optional services improve the quality of life for all Texans. The following information is designed to help the reader better understand the complicated features and concepts of local revenue caps and the impact caps would have on those services.
Click on one of these links to go to that section:
- How does a yearly ceiling on local government revenue affect its operation?
- How have revenue caps performed in Colorado?
- Are the revenue caps being proposed in Texas an improvement on the Colorado law?
- How do revenue caps affect the rainy day funds of local governments?
- What are some of the myths about local property taxes?
- Did the property tax relief of 1997 provide sustained property tax reduction?
- Why do some areas of the state favor caps? Doesn’t one size fit all?
- Did the recent school district property tax buy-down provide sustained property tax reduction?
- You’ve explained your position on revenue caps, why do you not support appraisal caps?
- What measures have been, or are currently underway, to help taxpayers? Are there any good alternatives to caps?
- Where can I learn more about local property taxes in Texas?
Linked documents below are in PDF format unless otherwise specified.
1. How does a yearly ceiling on local government revenue affect its operation?
Revenue caps assume that growth in the need for services is steady from year-to-year. In fact, local revenues and service needs often spike above or below proposed revenue limits. These spikes are caused by numerous factors such as local growth spurts, declining local or regional economies, receipt of – or reduction in – federal grants, and natural disasters or homeland security breaches. For local governments, these spikes are magnified because of the small revenue base local governments have in comparison to the state. In fact, the smaller the local jurisdiction, the larger the spike is likely to be. In years when local revenues are less than revenue cap limits, future revenues may be permanently reduced. The "ratchet down" effect occurs when an economic down cycle creates lower tax levies which also permanently reduces future allowed levies.
The current revenue cap allows voters to "rollback" the tax rate if officials adopt a high tax rate and the voters determine that the levy has increased too quickly. Most of the proposed caps would require officials to obtain prior approval for increasing levies through a costly and time-consuming election.
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2. How have revenue caps performed in Colorado?
Voters found it necessary to suspend the Taxpayers Bill of Rights (TABOR) in order for the state to function properly. The 1992 TABOR amendment, which enacted revenue caps, threatened many services provided by the state and local governments resulting in a taxpayer supported five year moratorium on TABOR in 2005. Reform of TABOR continues to be a top priority of many Colorado legislators, local officials, think tanks, and other organizations and individuals.
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3. Are the revenue caps being proposed in Texas an improvement on the Colorado law?
No, they are very similar to the caps in Colorado. The prominent feature of Colorado’s TABOR requires any new or increased revenue, beyond an inflation adjustment (based on the Consumer Price Index) combined with an adjustment for certain new growth, to receive prior voter approval. This is very similar to many of the proposals here in Texas.
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4. How do revenue caps affect the rainy day funds of local governments?
Revenue caps prevent surplus revenues from being set aside for a rainy day. Revenue caps require that any revenue set aside for reserve, or a rainy day fund, be counted as revenue subject to the revenue limit in the year it was set aside. Since revenue limits are constraining in good years and in bad, it becomes difficult to develop rainy day funds.
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- 5. What are some of the myths about local property taxes?
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Myth 1: Appraisal Equals Levy
Each year, when Texas homeowners receive their property tax appraisal notices, newspapers across the state run stories about people who believe their appraisals are too high or unfair. Some of these news articles indicate that a higher appraisal will automatically mean a higher tax bill from each taxing entity. This is simply not the case; it is not at all uncommon for a homeowner to pay less in local government property taxes even if the home’s appraisal value goes up.
Myth 2: The Comptroller’s Aggregate Property Tax Statistics Tell Us Something About Individual Residences
Each year, the state comptroller issues an extremely useful publication called the "Annual Property Tax Report." Among the many tables and graphs in this document is one that lists total tax levy by unit of government for the most recent two years. For example, a table in a recent edition of the report shows that in tax year 2005, the total municipal property tax levy in Texas was $4,901,791,597 and the total county property tax levy was $4,772,652,208. The table also shows that the corresponding municipal tax levy figure for tax year 2006 was $5,322,985,519, an increase of 8.6 percent, and $5,339,613,542 for counties, an increase of 11.9 percent. Does this mean that across the state the average homeowner’s municipal property tax bill increased by 8.6 percent and their county tax bill by 11.9 percent? Of course not. These aggregate statistics are not adjusted for new construction (commercial, industrial, and residential property that weren’t on the tax roll in 2005); taxable improvements to properties that were on the tax roll in 2005; or property that was annexed between 2005 and 2006. In other words, the state comptroller’s aggregate statistics simply cannot indicate changes in the municipal and county property taxes paid by individual residential homeowners.
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6. Did the property tax relief of 1997 provide sustained property tax reduction?
The 1997 tax cut did two things: (1) required schools to exempt the first $15,000 in appraised value (up from $5,000) from school property taxes; and, (2) allocated $1 billion in surplus state funds to schools to cover the cost of the increased exemption. The following year (1998), school district property taxes statewide grew by $940 million over the previous year. The tax cut may have slowed the increase in school property taxes, but because of a combination of inflation, population growth and growth in services, there was no appreciative or sustained relief.
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7. Why do some areas of the state favor caps? Doesn’t one size fit all?
For example, Harris County is one of 254 counties, and Houston is one city out of over 1,200 Texas cities. What works for Houston and Harris County may not work in all, or any, of the other counties and cities. In some areas of Harris County, taxes are extremely high in part because there are over 400 special taxing districts that Harris County voters have approved. They also voted to exceed the property tax limits in some of the large independent school districts, which caused the residents in those districts to have some of the highest property taxes in the state. Local problems can be solved at the local level. In fact, that’s what Houston residents did recently by amending the Houston city charter to limit their own local taxes.
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8. Did the recent school district property tax buy-down provide sustained property tax reduction?
If the expectation was that property taxes would decrease and then stay down permanently, then, no, there was not a sustained reduction for at least two reasons. First, the buy-down did not account for the pent up demand for additional school district revenue. Since many school districts were at or near the maximum legal tax rate (and had been for several years in some cases) they could not raise all the funds they needed. Predictably, once they found themselves well away from that legal limitation, some districts asked their voters for additional property tax revenue to pay for some of the things they had been missing. Second, some school districts claim the school property tax buy-down provides inadequate additional funding for the districts. As a result, normal growth alone ensures that school districts will be forced to raise additional revenue from the most immediate source available to them, i.e., local property taxes.
Local governments have been accused of "eating up" the $7 billion school property tax buy down. The Comptroller’s 2007 Annual Report shows that cities, counties and special districts increased their levies by almost $3 billion from 2005 to 2007 while school district levies decreased by $1.3 billion for a total increase of $1.6 billion.
Did the $3 billion increase by other local governments eat up the buy down? Clearly it did not. These increases would likely have occurred whether or not the school property tax buy down had happened. Inflation combined with growing demands for services by a growing population and increased federal and state mandates forced local governments to increase their levies.
But why did the school district levy only decrease by $1.3 billion? Wasn’t the school district levy supposed to decrease by $7 billion? What happened to the remaining $5.7 billion? For a number of reasons, including those listed above, many school districts found it necessary to increase their tax levies, usually with the approval of their local voters. The greater than expected school district levies, along with natural growth in the levies of other local governments, resulted in an overall property tax increase from 2005 to 2007. However, as TTARA points out, property taxes would be noticably higher if there had been no buy down.
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9. You’ve explained your position on revenue caps, why do you not support appraisal caps?
As Mark Haveman and Terri A. Sexton point out in their study of appraisal caps, Property Tax Assessment Limits: Lessons from Thirty Years of Experience, "[L]imits on assessed values, while favored by many homeowners, are a deeply flawed means to counter rising property taxes. They are offered in hope of reducing tax bills and slowing the shift in tax burdens to residential property, but in fact they can result in higher taxes for the very homeowners they are intended to assist and can cause unpredictable new shifts in tax liabilities. By severing the connection between property values and property taxes, assessment limits impose widely differing tax obligations on owners of identical properties, reduce economic growth by distorting taxpayer decision making, and greatly reduce the transparency and accountability of the property tax system
as a whole."
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10. What measures have been, or are currently underway, to help taxpayers? Are there any good alternatives to caps?
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11. Where can I learn more about local property taxes in Texas?
The Texas Comptroller of Public Accounts has a number of good publications that explain different aspects of the local property tax. Most are updated annually.
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