Texas homeowners have received the bad news from their appraisal districts; the appraisal review boards are overwhelmed for another year; and the issue of Texas’ onerous property tax should be on the table with every candidate running for the Texas legislature in 2022.
Unfortunately, even in the face of the public’s dissatisfaction with the current property tax scandal, many candidates, including some Republicans who claim the title of “conservative,” are, in reality, special interest candidates who are not easily persuaded the repeal of the property tax would benefit their constituents.
I recently visited with a young Republican candidate for the Texas legislature who is currently mayor pro-tem of a town north of Dallas. When asked if he would support repeal of the property tax with an expansion of the sales tax, he responded that he could not support that scenario.
When asked why, he responded that cities could not operate on only a sales tax in difficult economic times, since sales tax revenue fluctuates with the economy. What that tells me about him is he has a greater concern for government than the folks who fund government—the taxpayers.
In January 2021, the Texas Comptroller of Public Accounts published a booklet, State of Texas, Sources of Revenue, A history of state taxes and fees 1972-2020. Over that forty-eight year period, reduced revenue from the previous year, from sales and use tax, was reported in only five years. In contrast, over a thirty-six year period (1984-2020) the City of Dallas experienced nine years in which the property tax valuations were less than the prior year and three years where the property valuation increase was less than 2%.
Governments which rely on the property tax must often wait for appraisal districts to finalize the assessments, sometimes delayed because of the appraisal protest activity, in order to set their tax rates for the upcoming budgets. On the other hand, the sales tax is collected by merchants, remitted to the Texas Comptroller of public accounts, and after the State keeps an administrative fee of 2%, is distributed to each local entity monthly. Which means that sales and use tax is a continuing and somewhat predictable stream of income, while the property tax, collected in most part from October to the following February, is a future and unknown—until the appraisal district finalizes the property valuations—source of income.
Sales tax in times of extreme economic stress
The Covid pandemic which affected Americans with shut down of governments, restaurants, movies, schools, businesses, and many other retail and commercial establishments and the travel industry, has been the most extreme example of economic chaos since the great depression. Yet, while dire predictions were made and are still forthcoming from some, data indicates the economic effects in Texas may not have been as extreme as anticipated.
According to D Magazine, Dallas fared well during the height of the Covid19 pandemic. In its November 18, 2020 issue:
The city of Dallas didn’t let the pandemic get in the way of its spending. For the last fiscal year, of which COVID-19 infected the community for six months, sales tax receipts reported to the city of Dallas were only down less than a percentage point from the prior year. In all, Dallas brought in just $2.7 million less than it did in 2018-2019, an encouraging sign for the economy, if not for public health. That loss amounted to .9 percent.
The State of Texas’ sales and use tax revenue seems to have not been much affected by the Covid pandemic. Numbers from the Texas Controller of Public Accounts indicate the following sales tax revenues to the State by year: 2017—$28.875 billion; 2018—$31.905 billion; 2019—$33.960 billion; 2020—a$34.042 billion; 2021—$36 billion, which was an increase of 5.6% over the previous year.
On a local level, sales and use tax revenue fell in some cities and rose in other cities, and many of these reductions were on a monthly basis. For example, The Texas Tribune reported in a June 2020 article, “The latest state sales tax distribution to cities—based on April’s taxable sales—was down 11.1%. At the same time, the sales tax allocation to the city of San Marcos rose 51% for the same period.” In other words, the effects of the pandemic on sales tax revenues to local governments was not uniform.
An article in The Texan, dated September 13, 2021, with the headline, “Texas’ End-of-Fiscal-Year Tax Collections Show an Economic Rebound from the Pandemic’s Slowdown,” reported the following, “Fiscal Year 2021, which runs from September 2020 through August this year, experienced a 7.1% increase in overall tax collections and a 5.6 % increase in sales tax collections from the previous year.”
Property taxes are a continuing burden on property owners as appraisal districts continue to raise appraisals to shocking values around the state.
An article by Brandon Miller in the Austin Statesman-American, June 5, 2021, states:
In 2010, local governments in Texas collected $40.2 billion in property taxes. By 2019, the latest year for which data is available, that number had risen to $67.2 billion. Nearly half of these totals is collected from property taxes levied on single family homes.
That is a 67% increase over nine years.
A report by Matt Lively, KCEN-TV in Temple, Texas, published on March 22, 2022 cautioned what 2022 will bring in property taxes for central Texas:
WACO, Texas — Property values across the state of Texas are rising in 2022. In Bell County, the average will increase around 25 percent, whereas in McLennan County it will be around 30 percent.
These are one year increases by the local appraisal districts in that area.
A friend recently called me and asked what she should do after she received her appraisal for 2022. Her value increased by 400% over last year’s appraisal. My best advice was to sell the property if she could get the appraised value.
From 1992 to 2001, Houston’s sales tax revenue increased from $203.7 million to $329.7 million, a 62% increase. And, in Dallas, the sales tax revenue increased by 42% during the same period. At the same time, the property tax revenue to the City of Houston increased from $401 million to $572 million, a 42% increase.
From 2005 to 2019, Houston’s property appraisal value increased from $105.9 billion to $231.2 billion, which was a 118% increase. During these same years, Dallas’ appraised property value increased 98% from $70.8 billion to $140.2 billion.
Houston’s 2022 budget document includes actual line item amounts from the 2020 fiscal year. In 2020, Houston received $1.2 billion in property taxes and $684 million in sales and use tax for a total of $1.884 billion. The City of Houston levies a one cent sales tax. In 2020, with no property tax and a three cent sales tax, Houston would have brought in $2.05 billion in sales tax, or $166 million more than it received with both a property tax and a sales tax.
Property tax revenue for the City of Dallas increased 26% from 2018 to 2021. During the same period, sales tax revenue increased 15%. In 2021, Dallas received $1.153 billion in property tax revenue and $354 million in sales tax revenue for a total tax revenue of $1.507 billion. Dallas, with a population about half as large as Houston’s, generally receives about half the amount of sales tax revenue received by Houston.
In 2020, if Dallas’ only tax revenue had been a sales tax, in order to bring in the amount of revenue it received with both a property tax and sales tax, Dallas would have needed a sales tax rate of somewhere between 4.25 cents and 4.5 cents. A sales tax of 4.25 cents would have generated $1.505 billion, with a $2 million deficit; a sales tax of 4.5 cents would have generated $1.594 billion with a surplus of $86 million.
In 2019, the State of Texas collected $34.04 billion in sales tax revenue on a sales tax rate of 6.25%. This represents approximately $543 billion in statewide taxable sales. According to website TXSmartSchools, funding for Texas public schools in the 2018-19 school year included: $3.32 billion from the federal government; $27.37 billion in local taxes; and $23.7 billion from State of Texas funds, for a total of $54.4 billion. If a sales tax of 10.25 cents dedicated to public education had been in effect in 2019, the total revenue for public schools would have been $55.65 billion.
Benefits from repeal of the property tax
Several benefits would likely accrue if Texas repealed the property tax and replaced it with a sales tax. First, the current public school funding—known as recapture or Robin Hood—would most likely be abandoned. That funding method came about as a result of litigation which challenged the then current system for funding public education in Texas. Recapture assesses the wealth of independent school districts and “recaptures” funds from “wealthy” districts and redistributes to “poor” districts. Since the sales tax is portable and is not tied to property assets in a local district, it would be difficult to justify the “recapture” of funds for redistribution from a revenue source which may be collected from non-residents of a district as well as the district’s residents.
Some have called for the State to fully fund public education. If that occurs, the public education system would practically become an agency of the State and local school boards of elected trustees would have no reason to exist. Local bureaucracies would be replaced by a state bureaucracy. Assets of local districts could be transferred to the State of Texas and maintained by the State of Texas in the same manner as other State agencies. And, that would bring uniformity to the Texas education system.
The greatest benefit of replacing the property tax with an enhanced sales tax would be the relief for property owners who are squeezed each year by the surging increase in property values assigned by appraisal districts.
Since the property tax system is subjective, it relies on opinions of individuals as to a property’s value. Those may be educated opinions, nevertheless, they are opinions, which is the definition of subjectivity. There is no 100% guarantee that a property’s value is what an appraiser says it is. Only a legitimate sale of a property between two parties in an arms-length transaction sets a legitimate value, and then, on the date of the transaction. On the other hand, sales and use taxes are totally objective and not biased for or against anyone.
Arguments against the increase in sales tax have long been made portraying the sales tax as a regressive tax which hits lower income people harder than those in higher income brackets. However, a recent piece in the local media organization, El Paso Matters, after analyzing the valuations placed on hundreds of properties by the El Paso County Appraisal District, came to this conclusion:
The El Paso Matters analysis examined valuation trends in 297 subdivisions with at least 200 single-family homes. The analysis excluded subdivisions that have seen significant new home construction since 2020, because that distorts home valuation trends.
The analysis showed that the subdivisions with the highest rates of valuation increase over the past two years generally were working-class neighborhoods with low-cost housing.
The 15 El Paso County subdivisions with the highest rate of property valuation growth over the past two years had an average home value of just over $79,000 in 2020; the 15 subdivisions with the lowest rate of growth had an average home valuation of almost $193,000 in 2020. The valuation changes mark a shift in the overall property tax burden to neighborhoods that traditionally have had lower-cost housing.
Inefficiency of the property tax
The current property tax system is inefficient. Each of Texas’ 254 counties was required to create an appraisal district under state law. Those bureaucracies are funded by local taxing entities. According to O’Connor Tax Reduction Experts, in 2018, the budgets of the state’s appraisal districts totaled $523 million; by 2020 it had risen to $570.7 million; and in 2019, Texas appraisal districts employed 5,138 full time employees.
In addition, Texas counties spend millions of dollars on property tax collection. The elected
office of County Tax Assessor/Collector has two main roles: as agent for the State of Texas in automobile registration and title transfers; and the local role as the billing agent and recipient of property taxes for the county. Many county tax collectors also bill and collect property taxes for other political subdivisions within their counties.
Harris County’s 2020-2021 budget included $31.634 million for the Tax Assessor/Collector office. Dallas County’s 2020-2021 budget included $16.34 million for its Tax Assessor/Collector. These are the budgets for the entire operation of the office. But, in the Harris County FY 2023 budget, the property tax division will have seventy-two full time employees at a cost to taxpayers of $4,833,270. While repeal of the property tax would decrease the role of the county tax assessors, the office would still remain active in its other statutory functions.
Bexar County budgeted $12 million in its 2020-2021 budget for the Tax Assessor/Collector. That budget also approved 211 personnel for that office in that budget year. Of the 211 positions, 53 were approved for the property tax section of the department.
Another example of the inefficiency of the property tax system is the recent constitutional amendment election which contained two amendments to the Texas Constitution. Proposition One is legal gibberish which is not understandable, but corrects a previous action by the State Legislature which had negative unintended consequences—as does much federal and state law—for seniors and the disabled. Proposition Two increases the homestead exemption from $25,000 to $40,000 for local school property taxes. Which could mean slightly reduced property taxes for senior property owners on their school district tax bill.
Since the 1970s, more than fifty constitutional amendments directed at property tax exemptions have been offered up for Texas voters to approve at the polls. In 1997, a constitutional amendment to increase the homestead exemption from $5,000 to $15,000 on school taxes was approved by voters by a 93.8% vote. In 2015, voters, by a vote of 86%, adopted an amendment to increase the homestead exemption for school taxes from $15,000 to $25,000.
On the other hand, the simpler, more efficient method of collecting revenue, the sales and use tax, has seen only seven increases in 61 years. The last increase of the State sales tax was in 1991 when the State’s rate increased from 6% to 6.25%, and only two constitutional amendments concerning the dedication of portions of the sales tax, have been offered to Texas voters.
The only subjectivity involved in a sales and use tax is in determining what goods or services are taxable. For the most part, over the years, the exemption of groceries, medicine and medical services from sales tax has worked well for Texans.
Case studies of effect of property tax repeal
These case studies use real properties and real values on appraisal district rolls. The owners and their information are assumptions for the purpose of this exercise.
1. In 2022, John and Lulu Vandensmithereen filed a joint return with the IRS for their 2021 taxes. Their adjusted gross income for the tax year 2021 was $82,000. They live in Carrollton, Dallas County, Texas. Their home was valued at $264,000 (the taxable value) by the Dallas Central Appraisal District. Their property tax bill was $4,849. According to the IRS state and local sales and use tax calculator, they were entitled to a deduction from their federal income tax of $1,123 in sales tax. In their location, they pay a 2% local sales tax and the state’s 6.25% sales tax on taxable goods and services. The amount the IRS table allows—$1,123—represents purchases of $13,612 in taxable items for the tax year. Their total local tax bill was $5,972 (property tax + sales tax). Had the property tax been repealed and replaced with a $0.20 sales and use tax, the Vandensmithereens would have paid $2,722 assuming their taxable purchases were the $13,612 allowed in the IRS tables. That is a $3,250 saving in taxes.
2. John and Marilu Skiptoomylou own a home in the City of Dallas, in Collin County, in the Plano ISD. They pay property taxes to the City of Dallas, Collin County, Plano ISD, and the Collin College District. Collin Central Appraisal District appraised their property at $377,521 in 2021. Their 2022 appraisal increased to $415,573, a 10% increase.
After their property tax exemptions were applied, their 2021 property tax bills were calculated on the following assessments: Collin County—$356,645; Collin College—$372,521; Plano ISD—$352,521; City of Dallas—$302,017. John and Marilu paid the following property taxes in 2021: Collin County—$602.83; Collin College District—$302.56; Plano ISD—$4,655.92; City of Dallas—$2,335.49 for a total property tax bill of $7,896.80.
John and Marilu filed a joint income tax return for tax year 2021 with an adjusted gross income of $123,250. According to the IRS Sales Tax Calculator, John and Marilu were eligible for a sales tax deduction from their federal income tax of $1,386, which represents purchases of taxable items in the year 2021 in the amount of $16,800.
The Skiptoomylous paid a total tax bill of $9,282.80 ($7,896.80 property tax + $1,386 sales tax). If the local property tax had been repealed and replaced with a $0.25 sales and use tax, under the same scenario, John and Marilu would have paid $4,200 in sales tax which would have been a savings of $5,082.
3. William and Ruth Thingamabob live in Richardson, Texas, Dallas County, in the Richardson Independent School District. They filed a joint return with the IRS in 2021 listing an adjusted gross income of $97,000. They have no dependents.
The Dallas Central Appraisal District appraised their home at $282,900 in 2020 and 2021. However, in 2019, the District appraised the home at $188,990. The home increased in value 49.7% from 2018 to 2020 according to the appraisal district.
The Thingamabobs paid a total of $6,415 in property taxes in 2021. Using the IRS sales tax calculator, the family was allowed a deduction for sales tax in the amount of $1,188, which represents purchases of $14,400 in taxable goods for the year of 2021. With no property tax and a sales tax of $0.30, the Thingamabobs would have paid $4,320 in sales tax, assuming they purchased $14,400 in taxable goods during the year. They would have saved $2,095 in taxes.
4. Lom and Burda Krackenwiser live in Lewisville, Denton County, Texas. Their home was appraised at $319,069 in 2021 by the Denton Central Appraisal District. Lom and Burda filed a joint IRS return for 2021 with a gross adjusted income of$150,205. They have no dependents. The IRS sales tax calculator indicates they had a sales tax deduction of $1,492. This represents purchases of $18,084 in taxable goods and services.
If they had had no property tax and a sales tax of $0.20 in 2021, they would have paid $3,617 in sales tax instead of the $6,333 in property tax plus the $1,492 in sales tax—a total tax bill of $7,825. They would have saved $4,208 in taxes. Lom and Burda’s property value by the local appraisal district increased 10.6% from 2020 to 2021.
Assuming purchases of taxable goods of $18,084, Lom and Burda could have paid a 30% sales tax ($5,425) in lieu of the current 8.25% sales tax and their 2021 property tax and still would have saved $2,400 in taxes.
It is time the politicians in Austin repeal the Texas property tax.© Jim Terry
The views expressed by RenewAmerica columnists are their own and do not necessarily reflect the position of RenewAmerica or its affiliates.