An Unstable Economy Is Not the Time for Tax Cuts.
Property tax appraisals going out around Texas right now likely will give a boost to the Senate’s property tax cut proposals over the House plan for sales tax cuts. But a look at some of the appraisals show the Senate plan is too little to make a real difference to homeowners in fast growth areas. And an honest look at the state of the state’s economy finds the House plan borders on fiscal irresponsibility rather than fiscal conservatism.
The Texas economy is poised for a contraction, and, with that, comes a major decline in state government revenues. This may not be the time for tax cuts, even if this KPRC-TV map clearly shows the pain of rising appraisals, at least in Harris County. For an interactive version, click here.
The Wall Street Journal reported last week that a JP Morgan economist, Michael Feroli, is predicting some rough months ahead for Texas, even if the long term is strong. Former Dallas Federal Reserve President Richard Fisher had dismissed a similar prediction by Feroli late last year but now admits it is possible.
In a new report, Mr. Feroli was back to say he was right, and Mr. Fisher was wrong. “The only thing dropping in the Texas economy lately is the number of jobs,” he said in a report. The economist said Texas is now seeing the sort of job losses that would normally occur only in a recession.
Mr. Feroli pointed to a report from the Texas Workforce Commission showing the state lost 25,400 jobs in March. He said a proportional loss on the national scale would be if the U.S. lost 304,000 jobs – a recession-like outcome not seen in some time…
Mr. Feroli thinks Texas’ pain won’t last long term. A more nationally oriented financial system will help diffuse any negative impact on the credit sector, he noted. “Texas probably still faces some challenging months ahead, but for the medium and longer term we remain bullish,” Mr. Feroli said.
Mr. Fisher acknowledged Texas is facing what looks to be a “rough year,” although he added the downturn hitting his state to some degree tracks the slowing seen in the national economy.
“Energy prices have hurt,” Mr. Fisher said, but so too has the strong dollar, which weighs heavily on a strong exporting state like Texas. “We might expect a few more disappointing months in the Lone Star state, but if oil prices hold near current levels and the U.S. economy is able to regain its footing, Texas should eek out modestly positive job growth for the year,” he said.
Similarly, today’s Austin American-Statesman reported on increased signs of a potential state recession.
For the second time in the past two months, the Dallas Fed has scaled back its forecast for statewide job growth in 2015. Its Texas Leading Index, which predicts the trajectory of the state economy, has dropped for six consecutive months. And its latest business outlook surveys hint at an economic drawback, albeit one largely tied to certain industries and certain parts of the state.
The data to confirm any recession in Texas won’t come out for months. But what’s clear is that a sharp drop in oil prices prompted 25,400 statewide job losses in March — the first monthly drop in Texas payrolls in more than four years — and the energy sector has an even larger impact on the state’s gross domestic product.
“Oil and gas is a much bigger share of output than employment — about 2 percent of jobs but 13 percent of output — so a year or two from now we might see (we had) a quarter or two of recession,” said Keith Phillips, assistant vice president of the Dallas Fed’s San Antonio branch. If so, “it’s going to be short and shallow and would be more heavily on the output side than the employment side.”
The Proposed Sales Tax Rate Cut
The House well may be whistling past the graveyard in proposing a cut in the state sales tax rate in the tax package it sent to the Senate this week. The state sales tax rate cut from 6.25 percent to 5.95 percent may seem easy at first when you look at the comptroller’s revenue forecast from January. Sales tax collections to general revenue in January were 2.5 billion, an increase of 11.2 percent from the previous year. Comptroller Glenn Hegar in his revenue estimate reported that sales tax makes up 63 percent of state tax revenue, and he predicted an 8.9 percent increase in collections of the tax over the next two years.
But the estimate also noted that dramatic increases in sales tax collections in recent years was due to the hydraulic fracturing boom for oil and gas. Fossil fuel mining is a substantial stimulus to sales tax collections. Hagar additionally noted that the outcome of Southwest Royalties Inc. v. Combs, could result in a $2 billion refund on taxes collected on oil and gas well equipment used in manufacturing.
Subdued by recession then stimulated by the fracking boom, sales tax revenues were subject to erratic swings in the previous years . After contracting by 2 .7 percent in fiscal 2009 and by an additional 6 .6 percent in 2010, sales tax revenues rebounded by 9 .4 percent in 2011 as economic recovery strengthened . In 2012, Texas sales tax revenues surged by 12 .6 percent .
This volatility in sales tax revenues has been more pronounced with respect to business spending, particularly in oil and natural gas-related sectors, than with respect to consumer spending.
The House sales tax cut, HB 31, would reduce sales tax revenues by about $3.5 billion over the next two years. Combined with a possible cyclical decline in sales tax revenues plus the Southwest Royalties case, the state could see available revenues drop by $5.5 billion or more. Instead of rolling in the dough, lawmakers could find themselves back in special session to make budget cuts, raise tax rates or raid the Rainy Day Fund.
While cutting taxes may seem like the libertarian, small-government thing to do and may even have been promised by some incumbents during last year’s elections, more than half the Legislative membership lacks the institutional memory to fully grasp the consequences of such actions in the current atmosphere.
Seventy-seven of the 181 members of the current Legislature were children or teenagers in 1985, the last time there was a major economic bust in Texas. And 107 members were not in the Legislature in 2007 when a major property tax cut was passed. So few Texans saw a benefit from that tax cut that most thought it was a lie. The 2007 reworkingof the franchise or margins tax was ham-handed, but the idea behind it was to spread the state’s tax burden to all businesses so that it was not just carried by a few. Both the House and Senate plans essentially are returning Texas to a day when a few businesses pay the largest share of state taxes while the rest are given a pass on civic responsibility.
The Proposed Property Tax Cuts
There is absolutely no doubt that some areas of Texas are feeling the pinch of rising property taxes due to increased appraisals – and it is not just upper income homeowners. In Travis County, some of the areas with the greatest increases in residential home values are the traditional neighborhoods of the poor and minority residents of Austin. Redevelopment and gentrification have driving valuations up as much as 27 percent in some of those neighborhoods.
But the Senate’s property tax plan will be a boon to those who live in areas of stable or declining land values while doing little for the people most in need of tax-growth restraint. The Senate plan would raise the homestead exemption from $15,000 a year to 25 percent of the median home price, estimating a homestead exemption of $33,625 for 2016. The estimate is the change would save homeowners about $210 a year in taxes.
To show how little this does, I’m going to use the example of my own home, which is in one of those inner-Austin neighborhoods with rapidly increasing values. Our house is now appraised at 3.5 times more than we paid for it in 1994. That’s great if we wanted to sell, but taxing the difference between what we paid and what it is now worth is a tax on unrealized capital gains. Easily a third of our increased value has occurred since 2011 — $119,000, which is not far below the original purchase price. Without going into all the details, the assessed value of our home for this year will be about $41,000 higher than it was last year.
Using the Travis CAD estimates and comparing that to what we paid last year, our property taxes are likely to increase $1,641 next year. Subtract the $210, and we’ll pay about $1,400 more than the previous year. You can argue that we’ll pay less than we would have paid, but I think most of the similarly situated homeowners are going to sarcastically say: Thanks for the tax cut, Senate.
Here’s a quick tour of places where the Texas news media is reporting on appraisal increases.
In Montgomery County, appraised property values have increased by an average of 12.5 percent in 2015 over 2014 valuations, Castleschouldt said. Based on average home prices in the Magnolia area, some homeowners could see a property value increase of anywhere from $56,000 to $68,000.
“We have experienced, in the last several years, double digit [property tax] increases [throughout the area],” Castleschouldt said. “Harris County has gone up 15 percent, and Fort Bend [County] has gone up 14 to 16 percent. It just depends on if the [housing] market is really good in a particular area and if it is escalating. Believe me, that type of increase is not seen throughout the state of Texas, but is probably seen more in the metropolitan areas where the real estate market is extremely hot.”
Harris County, thanks to KHOU:
“About 90% of the homes in Harris County are going to see some increase,” explained Jack Barnett with the Harris County Appraisal District. “This year we are seeing about a 15% increase in residential property values.”
That means a home valued at $200,000 in 2014 will be closer to $230,000 on 2015. The reason for the hike is that Houston continues to grow.
KPRC detailed the areas of appraisal growth by zip code. The 77469 Zip Code between Sugar Land and Rosenberg saw property values increase by 81 percent since 2009. The map at the top of this Burkablog item is from KPRC. To see a larger version of the map and check out the full zip code list, click here.
In the state’s capital county of Travis, the Austin American-Statesman reports that the average increase in valuation was 11 percent. But unlike the Houston area where the growth is in newer neighborhoods, in Travis the inner city is increasing the fastest. And the fastest growth appears to be in those parts of town where the poorest residents and most minorities have lived but are being pushed hard by new construction and gentrification. One of those areas will see a 27 percent increase in its appraisals. Check out the map.
Appraisals are up about 7 percent in Bexar County.
The average market price of a homestead in Bexar County is $157,000, according to the appraisal district. That’s up from last year’s average of $147,000.
In the five-year period leading up to last year, real-estate values were on the decline. In 2008, the market value of a residential home in Bexar County was $148,000. Housing values fell until 2013, when values grew by 2 percent.
I couldn’t find any current year news reports for the North Texas area, but I’m sure they are running about the same. Rural Texas tends to have stable values, while some areas of South Texas have been in decline.
The real bottom line here is that tax cuts will not stimulate major new economic growth, only an increase in oil prices will do that. A property tax cut may taste good, but, for the homeowners who need a break the most, the Senate plan will just be empty calories. And with the short-term future of the Texas economy so uncertain, the House sales tax cuts look irresponsible. A good argument can be made against raising taxes during a recession to avoid budget cuts because the increase doesn’t go away when the economy rebounds. The same argument can be made against cutting taxes when times are flush, because the rate will not automatically increase when the money becomes short.
The truly responsible thing is for the Legislature to spend what it has in the best way possible for the state and put off any tax cuts until we know more about what the economy is doing.