A Lower Property Tax Cap Needs to Be as Dynamic as the Texas Economy

We can’t speak for the governor, but we do know more than a few homeowners in Texas who are driven to abstraction over their annual property tax bill. And for that reason alone, we expect the legislature to embrace some version of property tax reform this session.The problem is that in the Lone Star State, the annual bill foisted onto homeowners is the main event in the tax arena for a lot of voters, so there is a lot of demand for reform. At the same time, property taxes fund a major portion of government services, including public education and a variety of services provided by municipalities. To trim property taxes is to necessitate a corresponding trim to one or more essential services.As in other states, property tax bills are tied to home values, and in a state with an expanding economy and a growing population, home values can grow faster than wages. In other words, property tax bills can outrun a homeowner’s ability to pay. The Texas Public Policy Foundation estimates property taxes have risen in Texas by 212 percent from 1998 to 2017, which is twice the rate the average homeowner can afford.That’s a problem that Gov. Greg Abbott wants to address, and he has a serious plan — as championed in the State of the State speech Tuesday — that just might surface to the top in this year’s legislative session. His idea is to impose a 2.5 percent cap on the nominal rise in a homeowner’s property taxes. To put it in plain English, under the governor’s proposal regardless of what your property tax rate is the amount you owe to the government can only increase 2.5 percent each year, unless voters approve a higher number through an election.Like all things tax, the governor’s proposal is a little more complicated than that. He also would exempt most rural communities from his a cap (municipalities that collect less than $15 million a year). And a tax cap isn’t new. There is currently an eight percent cap in place. The question, therefore, is whether that cap should be set at 2.5 percent, left where it is now, or set at some number in between.Our advice is to set a new cap that is lower than the current one. After all, homeowners can’t continue to shoulder onerous increases in their property tax bills. Imposing a lower cap will create political pressure to broaden the base (yes, we are suggesting that commercial property should share more of the load than it does today) while also continuing to pressure public officials to be good stewards of tax dollars.By our assessment, 2.5 percent feels a little low and not flexible enough to accommodate changes in our very dynamic economy. The governor’s cap is a little bit above the rate of inflation the Federal Reserve targets for the economy, so from that perspective it makes sense to hold property taxes to something approximating inflation.But inflation isn’t the only economic factor to consider. In the event of a serious recession, we could see home values plunge and property tax receipts fall with them. Once such a recession ends, home values and the economy at large could rebound much more quickly than property taxes that are constrained by a 2.5 percent cap. In other words, with a rigid cap in place a recession could impose a deep, long-term cut in property tax receipts. And if major municipalities across the state see their tax revenues arbitrarily constrained under such a scenario, we’ll end up with rate hikes far above the cap and mounting political pressure to overturn the caps.Fiscal prudence requires spending money wisely, but it also requires designing systems that won’t run off the rails when the inevitable economic future arrives. Reform property taxes, but do so in the context of school finance reform and while allowing for the inevitable downturn. After a decade of growth, we may have forgotten what it feels like, but just as night follows day a downturn is inevitable.  Continue reading...