Why property appraisal caps are a bad idea – some taxpayers are subsidizing the property taxes of others

The practical effect is that those who live in areas with high market value appreciation rates will be subsidized by those who live in areas with low market value appreciation rates

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By Merle L. Moden

Local governments and school districts in Texas rely heavily on the property tax for the revenue needed to provide services. The Texas Constitution in Article VIII, Sec. 1 states: (a) Taxation shall be equal and uniform, and (b) All real property and tangible personal property in this State, unless exempt as required or permitted by this Constitution, whether owned by natural persons or corporations, other than municipal, shall be taxed in proportion to its value, which shall be ascertained as may be provided by law.”

The Texas Legislature established in the statutes creating appraisal districts that “value” means “market value” which is the benchmark for fair and equitable taxation. Appraisal districts must estimate the market value for each and every parcel of real property.

In 2007 a constitutional amendment was approved by the voters to amend Article VIII, Sec. (i) of the Texas Constitution to limit the annual increase in estimated market value for a residence homestead to10%. This 10% appraisal cap now makes it constitutional to levy property taxes on residence homesteads on an unfair and inequitable basis.

The practical effect is that those who live in areas with high market value appreciation rates will be subsidized by those who live in areas with low market value appreciation rates. While current economic conditions will most likely slow the growth in market values in the near term, recent experience in the Central Texas area points to more explosive growth when the economy recovers.

One might think that a 10% appraisal cap would be large enough to allow most, if not all, to fit under it. Estimated market value data from Travis County indicate otherwise. From 2007 to 2008 in Travis County the estimated market value of the median home increased by 11.3%. Detailed data for 59 zip codes indicate changes in estimated market value varying widely, ranging from -2.2% to +40.1%.

It is reasonable to expect wide variations in Hays County as well, as some areas are booming and some areas are not. It is clear, however, that a 10% appraisal cap applied to Travis County in 2008 would result in substantial unfairness and inequity, as those with increases in estimated market value at or below 10% would be taxed at 100% of estimated market value and those with increases over 10% would be taxed at less than estimated market value.

An area legislator is now proposing that the appraisal cap be lowered to 5%. This proposal would exacerbate the existing unfairness and inequity inherent in the current 10% cap. The inequitable taxation effect of appraisal caps are immediate and obvious.

Let me illustrate with three sample homesteads – H1, H2, and H3 – located in various parts of Hays County with each having the same $250,000 appraisal from last year. Using Wimberley area tax rates and homestead exemptions as examples, their tax levies would have been $3,868 each. For this year, let’s assume that due to differing market conditions and differing rates of appreciation in market value in the three areas in which these sample homesteads are located, appraisals increased 5% for H1, 10% for H2, and 15% for H3.

The appraisal ratios and tax impacts would be:
–With the current appraisal cap of 10%, H1 will pay 100% of estimated market value with a tax levy of $4,087, H2 will pay 100% of estimated market value with a tax levy of $4,309, and H3 will pay 96% of estimated market value with a tax levy of $4,309.
–With the proposed appraisal cap of 5%, H1 will pay 100% of estimated market value with a tax levy of $4,087, H2 will pay 95% of estimated market value with a tax levy of $4,087, and H3 will pay 91% of estimated market value with a tax levy of $4,087.

The current 10% appraisal cap produces inequitable results, since H3 receives a $217 tax subsidy. The proposed 5% appraisal cap produces additional inequitable results, since H2 would receive a $222 tax subsidy and H3 would receive a $439 tax subsidy. H1 gets to pay 100% of estimated market in both scenarios, simply because its estimated market value has increased 5% – not 10% or 15%. Consequently, appraisal caps provide the greatest tax subsidies for the homesteads with the highest appreciation in market value, while homesteads with market value appreciation at or below the appraisal cap percentage get no benefit from such caps. It is a fallacy to assume that these appraisals caps will provide property tax relief for all taxpayers.

The reductions in revenues to local governments and school districts resulting from the application of these appraisal caps will result in reduced services, increased tax rates, or both. In the event that tax rates are increased due to appraisal caps, the effect will be a shift in the burden of property taxation from those with increases in estimated market values above the appraisal cap to those with increases in estimated market values below the appraisal cap.

While I have no Hays County data to address the impact upon various areas of the county, one must wonder how this shift in property tax burden affects real people. For example, are capped appraisals more prevalent in affluent neighborhoods, less affluent neighborhoods, or are they evenly distributed across neighborhoods.

7 other ways to skin the property tax cat

Property tax relief could have been accomplished by means other than introducing unfair and inequitable appraisals. The Legislature can:

1) Ensure the most accurate appraisals by requiring the reporting of all sales prices to put the most up-to-date and accurate sales data in the hands of the appraisers
2) Increase the homestead exemption where all property taxpayers get relief
3) Lower tax rates and replace with State funds where all property taxpayers get relief
4) Eliminate the freeze at age 65 on appraisals for school taxes, and replace with a means tested system. What sense does it make to give homeowners with substantial incomes a freeze on their appraised values when they are 65 or older?
5) Eliminate the sham agriculture exemptions and sham open space exemptions by requiring more aggressive audits of these exemptions by appraisal districts, and tighten the requirements for these exemptions
6) Accumulate the tax subsidy amounts for capped residence appraisals and require their payment when the property is sold, and,
7) Increase motor fuel taxes (gasoline, diesel, and propane) sufficient to meet the State’s needs and to provide motor fuel tax rebates to local governments. Since motorists drive the demand for roadways – not residence homesteads, the burden of road and bridge construction and maintenance at both the State and local levels should be borne by motorists through motor fuels taxes, not by property taxpayers.

Merle L. Moden is a retired economist. He and his wife, Joy, moved to the Wimberley area from Austin in 1997. He served on the Austin Electric Utility Commission for several years, chaired a citizen’s committee on City of Austin Water and Wastewater cost of service, served on the Travis Central Appraisal District Board of Review, and was president of two neighborhood associations in Austin.