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Point Austin: All the King's Horses

The devil in the property tax details

By Michael King, Fri., July 25, 2014

"There's a nice knock-down argument for you!" – Humpty Dumpty

Article 8 of the Texas Constitution provides that "Taxation shall be equal and uniform," a good place to start any discussion of property tax reform. Across Texas, there are plenty of people agitating for "reforms" of the property tax system, although as in most such discussions, the word "reform" can be as malleable as Humpty Dumpty's definition of "glory." And since property taxes provide one solid leg of the state's revenue system – especially precious for public schools – it's not an idle discussion.

To some, property tax "reform" means one thing – "cut my bill." To a growing number of state Republicans, it has come to mean "abolish property taxes altogether" – although they grow vague when they try to describe how to pay for education, health care, transportation, and everything else.

Last week, the Travis County Democratic Party held a morning forum on property tax reform, headlined by county commissioner candidate Brigid Shea and state comptroller candidate Mike Collier. Shea didn't evoke any dissent when she described the property tax system as "broken," and Collier cited the constitution in emphasizing that property is supposed to be assessed for taxation purposes at market value – "equal and uniform" – "so that's the only place to start."

The issue statewide is that commercial and industrial property is effectively being assessed at a much lower value than most residential property – by some estimates, at an average of 60% of its actual market value. Most homeowners get hit for close to 100%, creating an imbalance that Shea said is "literally driving people out of their homes." In theory, that means we should be able to lessen the pressure on homeowners if commercial owners were paying their fair share. And also as usual, the devil is in the details.

Thumb on the Scales

Collier, the Houston CPA who's barnstorming the state on his "Texas Watchdog Tour," identified three basic problems with the current appraisal system: the definition of "comparable properties" in determining market value, the confidentiality of sales prices, and (really an umbrella issue) the power of money in appraisal negotiations. Commercial owners routinely appeal every valuation (the percentage is roughly 90%), appraisers can't certainly know what properties have been sold for, and should they lose a disputed judgment, appraisers pay the legal fees – not so the property owners, a perfect incentive for appraisers to capitulate to well-funded legal teams.

Collier acknowledged that fixing any of that would require legislative action – but argues that a "watchdog" comptroller could publicly pressure the Legislature to equalize the system by tightening the definition of comparables, by revealing sales prices (something 46 other states somehow manage to do), and by leveling the legal playing field between property owners and appraisers. "We need to make the system fairer," he told me later, and the first step toward doing that is to "drive towards market value everywhere." He also noted that the state tax system is complex and there have to be safeguards against "making things worse" – including, for example, "carve-outs" to protect small businesses that do not have major financial and legal resources.

By contrast, Collier's Republican opponent, Glenn Hegar, has proposed instead replacing property taxes with an unspecified "consumption tax" – which would have to be north of 20% to replace the revenue, and would be strongly regressive by definition.

Consequences Unintended

Collier deferred on specific approaches for Travis County, where property tax increases have been driven most strongly by rising prices – a "localized problem that requires localized solutions." Shea and others are also calling for market valuations of commercial properties – which sounds simple until one recalls that "commercial" also includes apartment complexes, in a town where 60% of residents are renters, most hardly able to absorb higher prices. There are also public rumbles for a city homestead exemption (Commissioner Ron Davis is lobbying City Council for a 20% exemption), and it's under consideration, but that too most aids the wealthiest homeowners – and helps renters not at all.

Shea argued Friday that since Austin rents are already about as high as the market can bear, commercial property owners would not readily be able to pass higher taxes on to their tenants. While I would certainly like to believe in the forbearance of landlords, a lifetime of personal experience has made me skeptical.

More worrisome is the larger concern that "property tax reform" movements readily become abolitionist – especially when pandered by conservative politicians. Shea noted the specter of Prop. 13, the 1978 California referendum that imposed hard appraisal caps, ignored rising property values, and resulted in the undermining of the state budget and the devastation of what was once the best public school and higher education system in the country.

Austin schools are already underfunded by the state's unconstitutional and inequitable recapture system, and the city's resources are strained by a burgeoning population, fully a quarter of whom are greatly dependent upon public services. Any property tax "reform" that rewards homeowners – and I'm one of them – at the expense of the public at large will only aggravate the economic inequality that already disfigures Austin's social landscape. Whatever we do, we can't afford to make things worse.

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