The testimony below was submitted to the Texas House Committee on Ways & Means on September 8, 2022, by the Texas Conservative Coalition Research Institute (TCCRI).
Texas Conservative Coalition Research Institute
House Committee on Ways & Means
September 8, 2022
Regarding the Committee’s Charge: Study Texas' property tax appraisal system and make appropriate recommendations to improve the appraisal system. The study should include: Assessing the accuracy of appraised values and operational effectiveness of appraisal districts; evaluating methods of selecting chief appraisers, appraisal review boards, and appraisal district directors; evaluating existing appraisal protections for taxpayers and ease of taxpayer participation in the appraisal process.
Background
Each of Texas’ 254 counties has a central appraisal district (CAD). Each CAD is tasked with appraising the values of properties within the district, with these values serving as the basis for property taxes assessed by the local taxing units (e.g., city, county, school district) within the CAD.
A CAD’s five-member board of directors (BOD) is appointed by the local taxing units that participate in the CAD. The voting power or a local taxing unit in a CAD is based on the percentage of the total property taxes imposed in that CAD by that unit. Notably, although a county’s borders are the same as its CAD’s, other local taxing units, such as cities and school districts, can be located in more than one CAD.
Generally, each CAD must establish an appraisal office, which is overseen by a chief appraiser appointed by the BOD. However, statute permits a CAD to contract with a taxing unit inside the CAD or with an appraisal office in a different CAD to handle the CAD’s appraisal obligations.
Each CAD must establish an appraisal review board (ARB), which must have at least three members; that number can be expanded in some circumstances. Members are appointed by the local administrative district judge. Members of the ARB must be current residents of the CAD and must have resided there for at least two years. ARBs are tasked with resolving disputes between a CAD and its taxpayers, or less commonly, between a CAD and one of the local taxing units within it.
Taxable values of property in a given tax year are determined as of January 1st. Chief appraisers mail notices of appraised value to property owners, although business owners submit rendition statements regarding their tangible commercial personal property. Property owners decide whether to protest appraisals. Tax assessors mail bills to homeowners by October 1st, and payments for the preceding tax year must be made by January 31st to avoid penalties.
The 87th Legislature enacted several strong reforms to the appraisal process. The following are particularly noteworthy:
Senate Bill 1 (87S3; Sen. Bettencourt), in conjunction with a constitutional amendment ratified by the voters in May 2022, increases the homestead exemption from school district property taxes from $25,000 to $40,000.
Senate Bill 63 (87R; Sen. Nelson), among other things, created deadlines by which appraisal districts must take action on certain exemption applications and property tax protests. The bill also imposes restrictions on former employees of CADs serving on BODs, and former ARB members being employed by CADs.
House Bill 988 (87R; Rep. Shine, et al.) authorizes taxpayers to file for limited binding arbitration to force a chief appraiser or ARB to honor the taxpayer’s procedural rights. The bill also requires the Comptroller to annually review each ARB’s hearing procedures.
House Bill 2941 modified the law to provide that ARB members are appointed by the local administrative district judge, just as they are in large counties. Prior to the bill’s effective date, the BOD appointed the members of the ARB in small counties. This previous arrangement created a conflict of interest with the BOD appointing the people who would review the appraisals made by the BOD’s employees.
Discussion
Even after the strong improvements made in the 87th Legislative Session, Texas’ appraisal system can be improved by addressing remaining flaws.
Problem 1: Appraisal District BODs Are Not Accountable to Voters
The first flaw concerns the manner in which members of the BOD are elected. A basic tenet of sound, limited government is that officials who control the taxation of the public must be accountable. In Texas, property taxes are driven by two factors: tax rates and property values. Tax rates are set by local government officials, who must run for re-election (if at all) on their record and whom the public can “vote out” if it so wishes. Property values, however, are determined by the CAD and its chief appraiser, both of whom are only indirectly accountable to voters through other parties. As noted above, the BOD of a CAD is elected by the respective governing bodies of the taxing units within the CAD.
Of course, the pivotal property tax reforms of the 86th Legislature in 2019 (House Bill 3 and Senate Bill 2) ensure that voters within a taxing unit do not see excessive year-over-year property tax increases beyond a certain threshold unless they first approve such increases in a “voter-approval” (formerly termed a “rollback”) election. But the generally applicable caps on a taxing unit’s year-over-year property tax revenue growth set forth in HB 3 and SB 2 (respectively, 2.5 percent and 3.5 percent, subject to exceptions) which can be exceeded only with the consent of voters are district-wide caps, not caps regarding individual properties. Year-over-year growth in the appraised value of a given taxpayer’s homestead can exceed those caps and reach all the way to ten percent. Given this fact, and irrespective of the reforms of HB 3 and SB 2, voters should be able to hold accountable the people controlling their appraisals.
Problem 2: The Ten Percent Cap on Year-over-Year Appraised Values Applies Only to Homesteads
Homestead owners in Texas enjoy the protection of the ten percent appraisal cap, which ensures that the appraised value of a property for tax purposes cannot increase by more than ten percent year-over-year (excluding any new improvements to the property). Over the last decade in Texas, property values have increased dramatically in many areas of the state, and this appraisal cap has protected homestead owners to a degree. Without the cap, some homeowners could have seen their property tax bills double in just a few years; even with the cap, annual 10 percent increases in appraised value will result in the doubling of property taxes in just over seven years, assuming tax rates are constant. Fortunately, as noted above, HB 3 and SB 2 offer taxpayers some additional protection.
But the cap is limited to homesteads. The cap does not protect second homes or commercial properties. Given Texas’ rapid growth in property values, these properties are susceptible to punishing annual tax increases. In just 2021, large cities in the state saw an 18-30 percent increase in housing values, and this explosive growth applies to commercial property as well.[i] In the third quarter of 2021, Houston and Dallas ranked first and third in the country, respectively, in terms of commercial property sales.[ii] Not only are commercial property appraisals uncapped, but recent tax relief enacted by the Legislature and approved by voters (SB 1, noted above) may have the incidental but unfortunate effect of shifting a portion of the aggregate residential property tax burden to business owners. With homestead owners enjoying a larger exemption from school district taxes, commercial property makes up a larger percentage of the school district property tax base than it did prior to SB 1. Of course, tax relief for homeowners is a high priority, but ideally there would be low property taxes on all property statewide; homesteads, second homes, and commercial properties. Additionally, capping appraisals on commercial properties would greatly benefit renters, who indirectly bear much of the burden of apartment owners’ property taxes.
Problem 3: Homestead Owners Lose a Key Benefit if They Relocate
Under current law, a homeowner who has lived in his or her homestead for years and has benefitted from the ten percent appraisal cap is effectively penalized if he or she sells the homestead and purchases a new one. For example, suppose a homeowner has lived in a fast-appreciating area (e.g., Austin) for the last 15 years. The taxable value of the house is $300,000, but without the cumulative benefits of the ten percent appraisal cap, the taxable value would be the market value of $400,000.[1] If the owner sells this house and purchases another property with the exact same market value as the sold house, the owner’s property taxes will go up significantly. In effect, the owner loses a property tax exemption of $100,000. Such a penalty will discourage homeowners from moving, and this scenario is likely to become more common in the next few years given the soaring home prices in Texas over the last few years. Ideally, people’s decisions to relocate intrastate should be driven by quality of life and economic considerations (e.g., moving for a better job), not whether they can retain property tax exemptions. If people feel compelled to remain in their houses for fear of losing what is effectively a large property tax exemption, the state potentially becomes less dynamic.
Recommendations
The 88th Legislature should consider the policy recommendations below, each of which addresses one of the three problems described above.
Policy Recommendation #1: Make the elected leaders of taxing units within a CAD serve as the BOD.
Greater accountability for appraisals could be achieved by having the elected heads of the taxing units within a CAD serve as the BOD and directly approve appraisals. By making the already-elected taxing entity officials serve as the BOD, real and long-overdue accountability and responsiveness would be injected into the administration of the property tax. Since these officials are already elected, voters will not have to educate themselves on another set of candidates, but will benefit because the appraisal process would become a subject for debate during election campaigns, with the members of appraisal boards having to defend their records.
Policy Recommendation #2: Extend the ten percent appraisal cap to all real estate in Texas.
Businesses in particular are hurt by the lack of a cap because they do not receive a homestead exemption, whereas owners of second homes at least have a homestead exemption on another property. Extending the ten percent appraisal cap to any or all non-homestead properties is a desirable goal, though it would require a constitutional amendment.
Policy Recommendation #3: Permit homestead sellers to transfer their “ten percent appraisal cap exemption” to their new homestead.
In the above example of a homestead with a $400,000 market value, there was a $100,000 exemption attributable to the ten percent appraisal cap (the “ten percent appraisal cap exemption”). If the owner of the property sold this homestead and purchased another homestead, the he or she should be able to transfer that $100,000 exemption to the new homestead. There are two possible ways in which to calculate the transferred exemption: either as a flat-dollar amount, or as a percentage of the previous homestead’s value. In the above example, the exemption transferring to the new property would be either $100,000 or 25 percent.
Notably, a similar concept exists in current law with respect to the “tax ceiling” for homestead owners who are age 65 or older or who are disabled. This tax ceiling caps the amount of school district property taxes such an owner pays annually at the amount he or she paid in the first tax year in which he or she qualified for the ceiling.[iii] Under the Texas constitution and Section 11.26(g) of the state Tax Code, when a beneficiary of this ceiling subsequently owns a different property that qualifies as a homestead, the tax ceiling transfers to the new property. This transferred exemption is in percentage terms rather than flat-dollar terms. For example, if a homeowner who currently qualifies for the ceiling pays $5,000 in school district property taxes but would pay $10,000 without the ceiling, then the ceiling on his or her subsequent homestead will be 50 percent of the school district property taxes that would be due on the subsequent homestead if no ceiling were in place.
This transferring concept can easily be applied to the ten percent appraisal cap exemption. In the above example of the homestead with a $400,000 market value and $300,000 taxable value, 25 percent of the value of the new homestead (again, ignoring all other applicable exemptions) would be exempt from school district property taxes. Thus, if the new homestead is worth $700,000, the taxable value of the property would be only $525,000 (i.e., 75 percent of $700,000).
Alternatively, the law could be amended to permit the buyer of a property to “step into the shoes” of the seller and benefit from any ten percent appraisal cap exemption that the seller had with respect to the property at the time of the sale, assuming that the property qualifies as a homestead in the hands of the buyer. Another variation would be to give a person who sells a homestead and buys a new homestead the choice of either carrying over his or her ten percent appraisal cap exemption from the sold property, or assuming the seller’s ten percent appraisal cap exemption on the new property.
Whatever its form, this third policy recommendation would also require a constitutional amendment.
END NOTES [1] Note that this simplified example ignores any other property tax exemptions that might apply.
[i] https://today.tamu.edu/2022/01/07/housing-shortage-expert-predicts-rate-increase-will-weaken-demand-encourages-buyers-to-be-patient/#:~:text=%E2%80%9CIn%20Austin%2C%20home%20prices%20are,price%20growth%20throughout%20the%20state.%E2%80%9D [ii] https://www.tpr.org/business/2021-12-08/texas-commercial-real-estate-market-heats-up-like-nowhere-else-in-the-country [iii] Section 11.26(a), Tax Code.