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Texas State and Local Property Taxes

We know you just got a letter telling you that your house is worth more than you thought, and now you owe the government more money.

Did it make you a little angry? Be honest.

There's more to that history than you may think.

We'll go into how the property tax used to be a wealth tax, how we eventually eliminated our state property tax, and how the state eventually took over our local property tax system.

We will start the history of Texas property taxes in 1845 when Texas became a state.

In 1845, the state property tax was a general property tax, or what we call a wealth tax today.

It consisted of everything you owned, not just real property or land.

The Constitution of 1845 stated that "taxation shall be equal and uniform throughout the state. All property in this state shall be taxed in proportion to its value, to be ascertained as directed by law, except such property as two-thirds of both houses of the legislature may think proper to exempt from taxation."

Texas then passed legislation outlining how they would value said property. It stated that "each person should give a list of his property and its valuation, verified by oath, and that the unrendered property of non-residents should be assessed by the assessor at its cash valuation and no more."

From 1845 to Texas' next and final Constitution in 1876, Texas property tax policy never stood still.

Sometimes, the county a person lived in collected their property tax; sometimes, it was the county the property was in, and sometimes, it was the state.

These three entities constantly fought over who would asses property value, collect property taxes, and spend the money from those taxes.

The constant shifting never let the state even come close to collecting property taxes across the whole state, and the places where it was collecting taxes were undervaluing the property they were reporting.

You can see why the early property tax was all over the place.

This period is when we get the Comptroller, tax assessor, and tax collector positions, mainly to value the property of non-county residents.

With the new Reconstruction Constitution (the same Constitution we have today), Texas implemented a 50-cent cap on property taxes.

This cap changed in the Constitution several times but settled on a general revenue rate of 12.5 cents, a school rate of 35 cents, and a Confederate pension rate of 7 cents by 1923.

The structures for assessing and collecting property taxes went through several iterations.

Texas created the state revenue agent, the state tax board, the state tax commissioner, boards of equalization, and the automatic tax rate board.

They passed several laws trying to define the value of businesses, the value of intangible assets, and the value of land.

However, with every improvement in property tax collection came a subsequent drop as people found ways around high property valuations.

Then, during the Great Depression, there was a 20 percent property tax delinquency rate, and the property tax as a percentage of revenue declined from 73.4 percent in 1915 to 18.3 percent in 1940.

The decrease in the importance of the property tax and the complexity of collecting it caused several reforms in the 30s, like the ability to pay in two installments, the homestead exemption, and the discount for early payment.

Then, in 1945, the State Auditor found that only seven counties correctly collected property taxes. That report, along with the continual decrease in the percentage of the budget, led to the abolition of the general revenue property tax in 1948, which took effect in 1951.

That year, the general fund property tax only comprised 8.1 percent of state taxes.

The Texas legislature repealed the school portion of the general state property tax in 1968 and the Confederate Veteran portion in 1979.

In 1982, Texas passed a constitutional amendment forbidding Texas from creating another state property tax.

So that it? Why do we still pay property taxes?

We still pay property taxes because local governments can still tax property.

Then why does it feel like we pay the state property taxes?

That history starts where the last one ended.

In 1973, in San Antonio Independent School District v. Rodriguez, the US Supreme Court pointed out the massive inequalities in our local property tax system.

The counties had all the problems the state had, but they did not have the resources to try fixing them. (Not that the state fixed them with all its resources.)

And on top of that, there were now 254 different solutions without compatibility.

So in the 1970s, Representative Wayne Peveto of Orange, Texas, advocated for standardization and passed a bill of his reforms in 1979 dubbed the "Peveto Bill."

First and foremost, the bill limited the property tax to real property. This tax is what we think of as a property tax today.

Then, it separated the assessing and collecting processes, creating county-wide Central Appraisal Districts. For Bell County, that's Bell CAD.

These CADs existed so that each piece of property had only one valuation, not a separate one from each taxing entity. They were also required to reassess property valuations every three years.

It also created a State Property Tax Board to oversee the CADs, which the legislature later gave to the Comptroller's office.

The state set limits to tax rates, increases, and exemptions through this bill. They also set up a system that funded local governments through property taxes but only let those governments control a few factors of those taxes.

Since then, the property tax system has undergone many small changes. So, instead of getting into those minutia and discussing the changes, let's examine our current system.

Let's start with the Central Appraisal District. What is it, and how does it work?

The Central Appraisal District's structure changed last year and takes effect on January 1st, 2025, so we will focus on that new structure.

The CAD will consist of a board of nine directors. One will be the County Tax Assessor/Collector (he won't be able to vote), the county taxing entities will appoint five, and the people will elect the final three.

The county's taxing entities vote on the five, weighted by the amount of money they bring in from property taxes. The board or three-fourths of the taxing entities can change this specific method.

Stay calm here because this board only has three powers. It hires a Chief Assessor, can fire that chief assessor, and sets his budget.

On January 1st, the legislature charges them with assessing the value of every piece of property in the county.

The Chief Assessor and their team will send the initial property valuations to property owners by April 1st (or May 1st for non-homesteads), so they have time to protest their valuations by May 15th.

Now, we get into the protest process. Your protest goes to an entity called the Appraisal Review Board. This board has jurisdiction to hear and rule on your protest.

The Administrative District Judge appoints the ARB for the county, which hears both your and the Chief Appraissor's sides before ruling. They hear their first case around May 1st and generally wrap up around July 20th.

Suppose you still aren't satisfied with the ruling. In that case, you have a lot of ways to appeal, either through Limited Binding Arbitration, Regular Binding Arbitration, the District Court, or the State Office of Administrative Hearings.

Don't worry; I won't go through all of those. At this point, you are almost definitely paying a lawyer more than you would save in property taxes, and they can go through the minutia with you.

This appeals process mainly ends on July 25th, when the CAD delivers the certified tax rolls to each taxing entity.

That's when the fun begins. Now, the taxing entities go through their tax rate process.

First, they must calculate two rates. One is the no new revenue rate. This rate is complicated to calculate but would bring in the same revenue as the previous year if no property had changed.

The second is the voter-approved rate. Depending on the municipality, there is a set rate increase that the taxing entity has to get approved by voters if they go over. Usually, this rate is a substantial increase.

The legislature set most of these limits in the 1970s, which means they experienced much higher inflation than we do today.

Once the entities find these rates, they will create their budgets, set their rates (usually somewhere between the two rates we just spoke about), publish that rate, hold two public hearings about that rate, and finally pass that rate.

All taxing entities will set their rates by October 1st when you and I will enjoy paying our property taxes. Then, on January 1st, the whole process starts over.

So, what are the problems with this system?

There are so many, but we'll just hit the highlights here.

The first is obvious. Even with nearly 200 years of reform, this system is still insanely complicated and expensive.

Compared with a sales or income tax, it's not even close.

The complexity comes from the difficulty of estimating real property value. Sure, when you live in a subdivision with 100 other houses like yours that regularly go on the market, it's relatively easy to get a close estimate, but beyond that, it gets complicated.

For a custom build, how do you know how the market will value that new porch you put in?

How do you evaluate trendy designs?

How do you value commercial property that the owner leased out to an overperforming company?

What about a commercial property that only serves as an occasional meeting spot for a much larger, remote company?

Texas's property valuation system is probably the best in the country and has a clear and robust protest system.

However, wealth taxes will always be complicated and, at least, a bit subjective.

The second issue is the morality and fairness of the system. A real property tax is a tax on a necessity. Unless you are homeless, you are paying property taxes directly or indirectly.

Being a tax on necessity means that it is regressive. People who make less money generally feel the effect of property tax more than those who make more, even if they aren't directly paying it.

And if a valuation on someone's home comes back wrong, then a wealthier person has more resources to challenge that valuation.

The third problem is the problem with all wealth taxes, which discourage wealth accumulation.

Property taxes do not take into account the taxpayer's ability to pay. Income tax refers to the amount of money coming in, and sales tax refers to the amount you spend.

No matter how well it is calibrated and cleverly designed, a property tax has no relation to one's ability to pay.

If someone bought a house that suddenly increased in value to the point where they could still pay the mortgage but not the taxes, they would have no remedy except to sell the house.

So, how do we solve this?

Texas has gotten rid of property taxes before and can do it again.

In the 20th century, Texas restrained spending, bringing the property tax down from 73.4% of state revenue to 8.3% of state revenue. We can do the same today.

Instead of occasionally buying down property taxes at the state level, the state should move more of the state sales tax revenues down to the local governments.

As more money moves to the local governments, include sales taxes in the no new revenue rate calculation.

Then, calculate the voter-approved rate as total revenue plus inflation and population. This way, local governments must get voter approval to increase real spending per capita.

These steps would reduce the amount of property taxes paid every year until sales tax revenue completely replaced them.

Depending on your growth and spending assumptions, this would occur between ten and twenty years from now, making Texas the only state without a property tax.

Talk about an engine for economic growth.

What do you think? Is eliminating property taxes too far?

Let me know in the comments.

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Steve Moody

Levi Bannigan

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