How Property Tax Caps Could Come Back to Bite Republicans

Republican leaders in Texas have made curbing local property-tax growth a top priority. Both houses of the Texas Legislature have filed (nearly identical) bills to limit property-tax growth to 2.5 percent per year.Property-tax caps pose a dilemma for fiscal conservatives, who generally support efforts to restrain government spending but also favor local-government autonomy.Support for local autonomy can be traced to a famous 1956 article by economist Charles Tiebout. Tiebout demonstrated that when political power is dispersed, citizens "vote with their feet," for example, moving from high-tax jurisdictions to low-tax ones, thus promoting efficiency by exerting competitive pressure on local governments.Tiebout notwithstanding, supporters of more stringent property-tax caps are right that there is a problem — and voting with one's feet, while helpful, may be an insufficient remedy. In many growing Texas communities, property values, and thus property taxes, have been growing at a much faster pace than the economy.A release from the office of State Sen. Paul Bettencourt, chair of the Senate Select Committee on Property Tax Reform, notes that Dallas County property taxes grew by 33 percent from 2013 to 2017. Texas' four largest cities (Houston, Dallas, San Antonio and Austin) all have had property-tax growth of 30 percent or more over that period.This growth, while a product of the strength of these local economies, is associated with two major problems. First, it imposes a substantial financial burden on homeowners. Despite increased housing wealth, rising tax burdens have led some middle-income households to downsize, switch to renting, or make difficult cuts in other areas of their budgets.Second, when tax increases are not legislated, local officials apparently feel unencumbered spending the new revenue. This is at odds with the Tiebout model, but is consistent with research finding that unexpected new revenue tends to stick with local governments, as opposed to the governments re-optimizing so as to divide the new revenue between the private and public sectors.How to proceed? A prudent approach is to complement more stringent revenue restrictions with wide discretion for localities to circumvent such restrictions, subject to voter approval. The proposals filed in the State House and Senate would do just this.The proposals call for lowering the current cap on revenue growth from 8 percent to 2.5 percent, while allowing exemptions for new construction. In contrast to the current cap, revenue growth would generally exceed a 2.5-percent cap.Under the current proposals, tax ratification elections would automatically be triggered if revenues would exceed the cap. Thus, the cap would not hamstring local governments, unless a majority of voters support the cap. The fact that this cap can be easily circumvented makes it more palatable. Furthermore, many in Austin view the proposed cap as an opening bid that would be raised in order to garner enough support for passage.A cause for concern: Talk of property-tax reform in Texas is coupled with promises of increased state funding. This could take the situation from bad to worse, defeating the purpose of reining in local governments.  Continue reading...