The new property tax cut plan from Dan Patrick and Jane Nelson will provide a tax break windfall for homeowners in rural and South Texas and mild tax relief for those with rapidly rising home values. But it also will shift the tax burden to renters and large taxpayers such as refineries while setting a potential pratfall for future legislators.
It is pretty easy to say any tax relief is better than no tax relief. And there unquestionably are enough breaks in the $4.6 billion package of property and business tax cuts for the lieutenant governor to engage in some chest thumping. “It has been long overdue,” Patrick said.
Senator Nelson’s portion of the package includes $2.5 billion in what she likes to call “tax relief” for the 2016-17 biennium. Why tax relief instead of a tax cut? We’ll come to that later.
Senate Bill 1 will increase the homestead exemption for school taxes from $15,000 a year to 25 percent of the Texas home median market value. Nelson said initially that will increase the exemption to about $33,625 in 2016 and is projected to go up to $35,979 in 2017. That essentially increases the homestead exemption by about $18,625 in 2016.
To figure out what that save you, multiply your local tax rate by $186.25. In Austin, the tax savings would be about $227; Dallas, $238; El Paso, $230; Fort Worth, $246; and Houston, $221.
So that local school districts don’t lose any funding, the budget includes $2.5 billion to make up for lost district revenues. Adoption of the new homestead exemption would require passage on September 12 of a constitutional amendment to set the new homestead exemption.
The proposed constitutional amendment also includes a provision to get the Texas Association of Realtors on board: a prohibition on collecting sales taxes on real estate transfers. That was one of the top items of the 2015 legislation agenda for the Realtors. See Page 21.
Additionally, Senate Bill 7 and 8 by Senator Nelson and Senator Charles Schwertner, R-Georgetown, would reduce taxes on small businesses by increasing from $1 million to $4 million the total revenue a business would have to have before paying the state franchise tax and would cut the franchise tax rate for all businesses by 15 percent. Schwertner said the exemption would remove 52 percent of the businesses in Texas from coverage by the franchise tax.
But all silver clouds have a dark lining, and this tax package is no exception.
There is no doubt that the property tax is the elephant of the Texas tax system. The state comptroller in December reported that the property tax generated $45.2 billion in state and local revenue in 2013, about 45 percent of all taxes raised in the state. The market value of single-family homes in Texas grew by $37 billion dollars and assessed value increased by $35.5 billion to a total school district taxable value of $812.3 billion. (Note: Corrected from trillion to billion.) The taxable assessments of single-family homes in Texas provided almost 44 percent of all the property tax value for the state’s school districts.
Those are numbers to make the mind boggle. And keep in mind those increases were from 2012 to 2013, when the market value only went up 3.87 percent. In 2006-2007, before the bust, the market value of single family homes when up almost 12 percent.
Here comes the down side. Property values don’t go up and down at the same rate in different parts of Texas. Home values in rural Texas are largely stagnant, and in South Texas a lot of home values are in decline. If you live in a fast-growth suburb or second-life inner city neighborhood, though, you are likely to be screaming about your rising property taxes. When a home’s market value doubles, so does its taxable value held in check only by a 10 percent cap on assessment increases. Unless you are planning to sell your home, this swift increase in assessment becomes a tax on unrealized capital gains.
And this creates the rub in the Patrick/Nelson plan. If you live in an area where values are stagnant or declining, this is a tax break windfall. If you live in a fast-increase area, the “tax relief” probably won’t actually cut your tax bill; it will just keep it from going up.
Here are a couple of examples drawn from appraisal district records. I randomly picked a couple of South Texas houses to review.
The first was a very low-income home with a market value of $22,453, and a present taxable value of $7,453. The Patrick/Nelson plan completely wipes out school taxes for this homeowner, who currently is paying about $94 a year to the Donna ISD.
I looked at another home in the Edinburg ISD, a more middle class dwelling with a taxable value of $122,867. Because of a declining real estate market, the homeowner already had seen the house’s tax bill cut by $227 last year. The tax plan would put another $230 tax cut on top of that.
Turning to one of those hot, inner-city neighborhoods of Austin, I found a house whose assessed value had increased from $288,944 in 2010 to $423,042 in 2014, for a school tax increase of about $1,639. But because of the 10 percent limit on appraisal increases, the home will see another $32,000 increase in value this year, an increase almost equal to the proposed homestead exemption increase. This homeowner may see a tax bill next year almost identical to the one for this year, especially when other city, county and special district taxes are included. They are not likely to feel like they got a tax cut, even if they got tax relief.
One of the major public relations problems of the 2006 property tax swap for school districts was it was sold as a tax cut. Most of the hard-hit taxpayers who were yelling for cuts were in the same position as the above Austin homeowner. They thought they were getting a tax cut and then were angry when their total bill did not go down. Remember, tax relief is not the same as a tax cut.
Then there is the additional problem that this package does not help people in apartments. It provides no tax relief for their landlords, so there is little likelihood of rent relief for the tenants.
Similarly, large-scale property tax payers such as refineries get no property tax relief in this plan, but the franchise tax exemptions do carve out small businesses as potential allies of the refineries in any tax fight to come. I know, it’s hard to get a soft spot in your heart for big petrochemical.
Then there is the potential pratfall. The Patrick/Nelson plan links the size of the homestead exemption to the median home price in Texas. During the major recession of 1985-90, many homes in Texas lost half their market value. According to the comptroller’s report, the market value of single-family homes declined .06 percent immediately after the 2008 recession. We’ll probably never see a price drop like the ‘80s again, but just assume a 30 percent decline, then suddenly the homestead exemption drops by almost $10,000. Explain that to the angry homeowner.
There’s a rule I once learned at a store measuring out candy. If someone wants a pound, start by putting three-quarters of a pound on the scale and then keep adding until you are at a pound. The customer will feel overjoyed at getting more. But if you put a pound-point-one into the scale and take some away, the customer will feel cheated. That’s what many homeowners felt after the 2006 tax swap, and quite likely what many might feel after this “tax relief.”