Introduction

Property taxes are the largest source of general fund revenue for local government in Texas and across the U.S. This tax is more stable than sales taxes when it comes to economic cycles. It is also more important in Texas than in most other states. It often escapes public perception, but cities account for a very small share of the total property tax burden.

Property Tax Nationally

The Rockefeller Institute refers to property taxes as the financial backbone of local government in the U.S. It accounts for nearly three-quarters of total local tax collections and is the main way localities fund K-12 education, police, fire, parks, and other high-profile services. Property taxes are also the foundation of a local government’s capacity to issue debt for capital projects. Local governments collect over $400 billion annually in property taxes.

Texas Property Tax

The current property tax system in Texas dates from 1979. In that year, reforms were implemented to the local property tax process and the final vestiges of the statewide property tax were eliminated. In Texas, counties, cities, school districts, municipal utilities, community college districts and other special districts may levy a property tax.

Property tax is levied on land, improvements (structures) and revenue-generating personal property (also known as business personal property.) When homeowners and businesses receive their estimated tax bills in the fall, they are seeing the combined tax owed to all local governments. According to data from the Texas Comptroller, in 2014, $49.1 billion in property tax revenues were collected by local governments. The largest share was for school districts. Schools consumed 55 percent of all Texas property taxes. Counties took the second largest amount at 17 percent. Cities accounted for only 16 percent of the total. Special districts claimed the remaining 13 percent.

Residents and businesses often fail to notice the distinction when faced with the total tax bill. This can be a challenge to city leaders. Not every household has children in the local schools, but core city services are familiar to all and used by many. In the public eye, their total property taxes may appear to go entirely to support police, streets, parks and libraries. It is easy for citizens to note deficiencies with these city services and then compare them to their total tax bill.

The risks for city leaders is compounded because total collections by other local governments is increasing faster than for cities. Since 2009, total property tax collections have increased by 23 percent. City property tax revenue increased by 19 percent. At the same time, school districts took in 23 percent more revenue. Counties saw a 25 percent increase in property taxes. City leaders may need to assume a greater role in educating constituents on this issue.

Economics of Property Taxes

Property taxes are a sort of stabilizer on municipal budgets. In economic downturns, appraised property values respond slowly. The full effect of a downturn may take several years to be registered in property values. Nationally, property tax revenue fell for three years after the bottom of the Great Recession. If that decrease had been as quick and automatic as the decrease in sales taxes, the necessary budget cuts would have been devastating to local governments. The slower decrease gave local leaders time to streamline and reorganize services. Further, since cities set their rate annually, they have some flexibility in adjusting to changing economic conditions.

In Texas, state “Truth in Taxation” automatically gives cities an effective tax rate that yields the same revenue as last year. Falling property appraisals drive up these effective tax rates automatically. By simply adopting the effective rate, a City Council can avoid the risk of a roll-back proposition and election. In very difficult economic times, however, City Councils may choose to adopt a lower than effective rate, but they need not do so under state law.

This process works in reverse as well. In a booming real estate market, the slow adjustment of appraisals, and in Texas, the threat of a roll-back election, puts a damper on municipal budget growth. This also helps city leaders by encouraging them to plan carefully. There is a perpetual need for basic services regardless of where we are in the economic cycle.

Next Week

Come back next week where we will look at the second largest general fund service for most cities – fire / rescue operations. In the meantime, sign up for email updates and let us know how we can help.