What Happened to the Property Tax Cut?
Mon November 12, 2007 5:03 am

State Rep. Betty Brown circulated a letter last week lamenting the erosion of the property tax cut. It appeared on the Web site TexasISD.com, which bills itself as the “Homepage for Texas School Officials.” Brown’s letter is all too indicative of the mindset of many House members: that tax cuts are more important than education and that local officials are spendthrifts who need to be reined in by state lawmakers.

Here is Brown’s letter, with my comments in boldface:

In recent weeks, opinion pages in newspapers across the state have been filled with commentaries asking what has happened to the property tax relief that homeowners and businesses are supposed to be receiving. An article in the Austin American-Statesman on October 22 entitled “What happened to the tax cut?” is indicative of this trend.

As state legislators, we would like to set the record straight. In May 2006, we established the Property Tax Relief Fund and mandated that school districts lower their tax rates by one-third by 2008. The Property Tax Relief Fund provides the necessary state revenue to school districts to allow them to reduce their tax rates. Our actions were intended to provide meaningful and much-needed relief for property tax payers. The new maximum tax rate is $1.00 per $100 of appraised property value; however, school districts are permitted to raise their rate to $1.04 one time without voter approval, or as high as $1.17 if they receive voter approval in a tax rate election.

While school districts are happy to trumpet that their school boards have lowered rates, voters should be clear that they are legislatively mandated to do so. The Legislature made difficult decisions necessary to ensure that property tax rate cuts can be funded now and into the future. As a result, the revenue that school districts lose because of their mandated rate cuts is being refunded to them by the state.

Brown writes, “The Legislature made difficult decisions necessary to ensure that property tax rate cuts can be funded now and into the future.” This is false. The Legislature did not ensure that tax cuts can be funded into the future. Although lawmakers reformed the state’s business tax and raised additional money from increased levies on tobacco and used car sales, these changes did not come close to paying for – that is, replacing the revenue lost due to – the property tax cuts. The shortfall was $5.2 billion. The Legislature made up the difference by dipping into cash on hand. Unless revenue from the business tax exceeds all expectations, the Legislature will have to continue to rely on cash on hand to maintain the tax cuts. This is not a problem as long as there is sufficient cash on hand, but … as property values rise, the cost of maintaining the tax cut grows. This is not a fiscally sound system, and it is made less so by relying on higher tobacco taxes, which are known to reduce consumption (and therefore revenue). The tobacco tax is projected to raise $100 million less in 2010-2011 than in 2008-08. In short, the Legislature delivered more tax cuts than it could afford to pay for, seeking short-term political gain. You would think Betty Brown would understand this; she is a member of the Appropriations committee.

Despite our hard work, there are three issues that are undermining the property tax rate relief that we provided.

1). School districts are permitted to increase their property tax rates up to $1.17 if they receive voter approval. There are 115 tax rate elections on local ballots in November; many districts are asking for the maximum increase to $1.17. Although this is still lower than the $1.50 maximum that was in force before we enacted reforms in 2006, property tax payers in these districts will see a significant erosion of their tax relief if the higher rate is enacted.

School district officials’ willingness to raise tax rates to the maximum permissible level will not only erode the tax relief that we sought to provide, it will also land the school finance system back in court. In 2005, the Texas Supreme Court ruled that the large number school districts taxing at or near the $1.50 state-imposed rate cap meant that the school district property tax was effectively a state property tax, which is disallowed by the Texas Constitution. If school districts continue to push their rates to the cap, the school finance system will again run afoul of this constitutional provision.

Of course the school finance system “will again run afoul of this constitutional provision.” So long as the Legislature continues to rely on local property taxes to fund education, the never-ending cycle of school finance lawsuits followed by “reform” will truly never end. Texas has chosen not to have a state income tax. Consequently, the 3.4% of personal income that Texans pay in property taxes ranks ranks 10th among all states. The only way to avoid the problem Brown complains about – rising school property taxes, which approach a cap imposed by the Legislature, which amounts to a state property tax – is to reduce the state’s reliance on property taxes. Since Texas is not going to have a state income tax, the only other source of revenue that could help wean Texas off property taxes is casino gambling, and I doubt that the revenue would be sufficient. In the meantime, one reason why school districts are going to the voters to seek approval of tax increases – and 77% of the districts that had tax rate elections on November 6 were successful – is that they don’t trust a legislature that is full of people like Betty Brown, who are more interested in getting credit for tax relief than in funding public education.

2). Rising property appraisals contribute to the erosion of property tax relief. Although annual appraisal increases are capped by the state at ten percent, in many cases, an appraisal increase can negate rate cuts over time. Harris County Tax Assessor-Collector Paul Bettencourt pointed out in April 2007 that “even within the first year of the buydown of ISD rates, Houston area homeowners are still paying slightly more in property taxes on their combined bill.” In Dallas County, according the Dallas Morning News, taxable value for the 2007 tax year is up 20 percent compared to the 2006 tax year. The Austin American-Statesman reports that the average value of a home in the Austin Independent School District has increased from $196,039 to $226,720 since we enacted tax rate relief.

3). Bond issues presented to voters by school district officials can further erode property tax relief. Statewide, there are 58 school district bond issues that will be put to local voters in November. These bond issues are in addition to those that passed earlier this year: in May, bond issues were put to voters in 134 school districts and 116 (87%) of these districts successfully approved at least one bond issue, encumbering local taxpayers with $7.4 billion in new debt. Given the success rate of the May bond propositions, it is likely that most of the bond issues on the ballot in November will also pass. Each bond issue places school districts in greater debt and ties property tax payers in the district to repaying the debt many years into the future. If every bond proposal passes in November, the total amount of new debt will be $7.5 billion, which drives property taxes even higher.

These three issues all have one factor in common: they demonstrate that locally elected officials are rapidly eroding the property tax relief that we fought so hard to provide. Voters must be clear that this is what is happening: the state is attempting to provide property tax relief by funding rate cuts, but the relief is being eroded at the local level through increasing rates, appraisal, and debt.

What Brown appears to be arguing is that districts should not seek to build new schools or to renovate old ones, or to raise teachers’ salaries, or to seek funds for inflationary costs for which the Legislature failed to provide, so that voters can receive the maximum tax cut – and legislators can receive the maximum political benefit. To the Betty Browns of the Texas Legislature, locally elected officials who seek to provide a better education for their communities are the enemy.

I supported the property tax cuts in 2006. They were an essential part of the creation of a constitutional school system. But lawmakers ought to recognize by now that a school finance scheme that relies so heavily on local property taxes (so that the Legislature doesn’t have to raise state taxes) will always be in constitutional peril, unless the cap is raised or the prohibition against a state property tax is repealed or another source of revenue is found (and, remember, an income tax is also constitutionally prohibited) – and we all know that these options are off the table. The least one should be able to ask of the Legislature is to allow school districts to use the ability lawmakers gave them to ask voters to grant them more revenue without being accused of trying to undermine tax relief.

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