A story of ad valorem aphorisms, idioms, & analogy’s , oh my! It seems that every Texan hates property taxes. Any tax that can cause you to lose your home or business may well deserve to be called...
Property Taxes
|
6 min read
A story of ad valorem aphorisms, idioms, & analogy’s , oh my!
It seems that every Texan hates property taxes. Any tax that can cause you to lose your home or business may well deserve to be called "the most hated tax" and "inherently evil" as some people do. I’m sensing some hostility here.
Collectively, with about $82 billion in property taxes assessed on an annual basis, Texas has the 7th highest property tax burden in the country. 58% of Texas voters said that property taxes have a “major impact” on their personal finances. As it stands today, all 50 states have a property tax, to some degree or another. Driven by rising property values and increasing tax bills, a movement to eliminate property taxes is gaining momentum in Texas and several other states.
So, how do you replace property taxes every biennium without increasing Texans’ overall tax burden? That’s the 82 billion dollar question. Finding a suitable alternative to property taxes is a major reason why abolition measures typically fizzle out.
No one has figured out how, at least not in a way policy makers can agree on. The debate over eliminating property taxes is one about tradeoffs. The challenge is to find practical ways to protect taxpayers, primarily homeowners, without undermining the bedrock of local government funding.
What don’t Texans like about the property tax?
Let’s talk about what irks taxpayers the most.
- Property taxes can be volatile, unpredictable, and can increase at a faster rate than household incomes causing a disproportionate impact on homeowners on fixed or low incomes.
- Property taxes have no regard to the owners’ ability to pay.
- Property taxes are tantamount to a tax on “paper wealth” or “unrealized gains” unless they sell the property. True, with exceptions. A property owner can realize gain without having to sell by getting a home equity loan or home equity line of credit (HELOC).
- The perceived unfairness and inequality: "wealthier owners have greater access to fairer property values and more fair taxes." In reality, everyone has the same access to appeal their property values/taxes. Wealthier people can and do hire professionals to appeal on their behalf, affording them the best chances for success. But budget friendly professional options are also available to lower income families who may not be aware of these services.
- Property taxes infringe on private property rights. You never truly own your property. You just rent it from the government. We'll discuss this later.
- The property tax mass appraisal system has flaws, inconsistencies, and errors. True. No doubt. It's not a perfect system, but it's the best we have.
- People being taxed out of their homes for inability to pay, which is true with exceptions. Elderly homeowners age 65 and older who qualify and apply for the Homestead Exemption can defer payment of property taxes until they sell the property, no longer occupy the property as their primary residence, or pass away. Homeowners under 65 are not afforded this protection.
Why do we need it? What is property tax revenue used for?
The elimination of taxes is kind of like hitting the nuclear missile button. Once it’s launched, there’s no going back. You may also not like the fallout it causes when it lands. The revenue generated by the ad valorem or property tax is typically the largest source of revenue for local governments. It provides funding for:
- Public schools
- Police/fire/emergency services
- Local roads
- Maintenance
- Public transit
- Utilities
- Parks
- Libraries
- Public buildings and facilities
Who wants to abolish property taxes?
Let’s unpack the property tax conundrum: the need for revenue versus taxpayer affordability. On the 2024 Texas Republican primary ballot, the question was asked if “Texas should eliminate property taxes without increasing Texans’ overall tax burden.” The majority of voting Texans said yes, which is expected since property owners want to stop paying property taxes.
Many politicians, including Texas Governor Greg Abbott advocate for the abolishment or phasing out property taxes entirely. “What we want to achieve in the state of Texas is to eliminate your property taxes. Make them go away,” said Gov. Greg Abbott. Some think tanks and public policy groups also want to see property taxes go away, going as far as saying they are a form of government stealing and claim property taxes “are outside the designs of the Creator of the Universe.”
What is the argument for keeping the property tax?
Property taxes are not only a major source of revenue for states and localities but tend to be their most reliable source of funding. It fluctuates less than sales and income taxes with changes in economic conditions. It provides a stable and predictable income stream for local budgets, which helps maintain the quality of life and infrastructure that benefits all residents and businesses.
The Myth of Ownership
When we buy property, we think we own it, right? Well, you and the mortgage lender, since most people must get a loan to purchase their home. Commonly, a deed of trust secures the interests of the lender who can foreclose on the property if the owner/borrower defaults on their repayments. In real estate, a bundle of rights is a set of legal privileges that is generally afforded to a buyer of property with the transfer of title.
It is made up of five different rights: right of possession, right of control, right of exclusion, right of enjoyment, and the right of disposition. These rights are not absolute and are subject to limitations such as mortgages, zoning laws, easements, HOA covenants, deed restrictions, eminent domain, and liens including property tax liens.
Even though we think we own our property, we own it but with conditions. Don’t pay your mortgage, the lender taketh away. Don’t pay your taxes, the government taketh away.
Possible solutions
Short of abolishing property taxes, it may be possible to provide relief by:
- Rate limits on tax rates - Levy limits are a possible way of providing tax relief without creating market distortions. A 0% voter approval rate for local property tax has been proposed, meaning if cities, counties, and schools want any increase in tax revenue by more than 3.5% for cities and counties, and 2.5% for schools over the prior year, they must get voter approval.
- Expand the tax deferral to all homestead owners - Providing a tax deferral option for Homestead owners younger than age 65 would prevent homestead owners from losing their home due to unpaid property taxes.
- State surplus dollars - Phase out property taxes over 10 years using $0.90 of every surplus dollar to compress ISD M&O (Maintenance & Operation) rates to zero. Problem? It’s unreliable. Legislators may have already bitten off more than they can chew with property tax cuts, as $51 billion in property tax relief has already been provided. There is no guarantee Texas will have future surpluses.. We may not like the unintended consequences that arise when we get there. How do you pay for government services in non-surplus years?
- Sales taxes - Texas has the 13th highest state sales tax in the nation at 6.25%. To abolish the school tax M&O only, the rate would have to increase to over 12% and would still leave 2/3 of property taxes intact. To replace all property taxes with a sales tax would require raising the sales tax rate to over 20%, more than double that of Tennessee, the state with the highest sales tax rate. The sales tax has its flaws as well. Other than having to be astronomically high, it is also a much more regressive tax than property tax as it takes a larger percentage of income from low-income households than high-income households.
- State income tax - Texas passed a constitutional amendment in 2019 prohibiting a state income tax, eliminating it as an option.
- State budget cuts - Good luck with that.
- Remove some existing exemptions, expanding the tax base - Guaranteed to have a lot of pushback from powerful special interest groups.
Time to land the plane
The Texas property tax system is flawed, no question. But Texas has the most tax-payer friendly system in the country where a property owner has the ability and privilege of appealing a property value in a non-judicial or overly bureaucratic process. You can’t say that about most other states. The need to fund our schools, police, fire protection, and other essential services is not going away, and state government can’t promise to do it.
The question is which system or systems are the least bad method of funding the government? On one hand, the property tax is a stable, adequate, and reliable source of government revenue. On the other, it does have serious concerns with equity, transparency, and affordability. Is it time to scrap it for junk or can it be repaired and improved with new parts and technology?
We have to consider that eliminating property taxes might create more problems than it solves. If we stay on the journey to abolish property taxes, we may not like it when we get there. For now, do we continue to “dance with the one who brung us” or do we choose to live in a post ad valorem apocalypse? Either way, we know one thing is certain, death and taxes. Property tax, sales tax, or otherwise.
Let Us Know What You Thought about this Post.
Put your Comment Below.