Tag Archives: property tax

Forecasting Property Tax Base

Posted on by

This week we conclude our series on property taxes by introducing our method for forecasting municipal property tax base if you want to build your own property tax forecast. We have used these variables to build models to support municipal budgeting and they should be helpful for any community in North Texas.

Components of the Tax Base

When doing the forecast you will get more accurate results by creating separate forecasts for the three major categories of property tax base: commercial real property, residential real property and business personal property. Many economic indicators are logical predictors of property tax base, but the following have consistently been statistically significant and contribute to more accurate forecasts.

Variables for Forecasting Commercial Real Property

Three indicators have been effective in forecasting commercial real property. The first is historical commercial real property tax base. This information can come from old budget documents or from your central appraisal district. The second variable is total commercial construction. This can also be obtained from the appraisal district for past years, but another good source may be your municipal building inspection permit data. One or the other may be significant for your community. The final variable is a national statistic, annual gross domestic product (GDP.) This indicator picks up the overall national business cycle, which can have an impact on commercial finance and employment trends which, in turn, influence local demand for real estate and drive up or depress local property values.

Variables for Forecasting Residential Real Property

We find four variables are significant predictors of residential property tax base. The first is historical residential tax base. The second is municipal population. This can come from the Texas Demographic Center. You may need to do your own estimates to obtain the most recent annual values. The third variable is your property tax rate. The final indicator is a national statistic and a subset of the gross domestic product called residential investment. This indicator represents the national housing business cycle and has proven to be a statistically significant predictor of residential tax base in the DFW area.

Variables for Forecasting Business Personal Property

For most cities, business personal property is the smallest of the three tax base categories, but we found it is the most complicated to forecast. We have settled on five indicators that are necessary to predict it. The first is historical business personal property. The second is the Texas Business Cycle Index, which is compiled by the Federal Reserve Bank of Dallas. The third variable is the vacancy rate for retail real estate. You can obtain this from one of the commercial real estate data vendors. A second real estate variable, and the fourth in our model, is total occupied commercial inventory (office, industrial and retail). Finally, annual gross domestic product is also important.

Running the Forecast

We have been using this mix of indicators for many years to track local tax base performance. The art of forecasting means experimenting with various functional forms of these and other variables until you find the equations that do the best job of explaining your city’s historical tax base change. It is best if you build the forecast model in a statistical software program like Eviews or STATA. Once you have finalize the forecast models you can transfer them to Excel to do sensitivity analysis and run scenarios. If you want to learn more about our process let us know. You can use our contact form.

Next week we begin a series on measuring economic wellbeing and how and why economists developed widely used indicators like gross domestic product.

Changing Tax Base in Dallas County

Posted on by

This week we review changes in property market values and tax base for 25 cities in Dallas County since 2007. This builds on the analysis throughout the last month focusing on the property tax and its importance to local cities. Last week we looked at the structure of the tax base in our 25 cities on the eve of the Great Recession in 2007. Since then, there has been substantial change in the local economy.

Total Taxable Value

Our 25 cities saw their combined tax bases grow by 30 percent between 2007 and 2016. The average change for these cities was 45 percent and the median change was 27 percent. The largest and smallest changes were 308 percent and 3 percent, respectively.

Residential and Commercial Changes

Because of some changes in reporting over the period, it is difficult to calculate an accurate change in tax base by commercial and residential categories. Instead, we can present the changes in market value for these categories.

The combined residential market values for the 25 cities grew 29 percent from 2007 to 2016. The average of the individual city changes was 24 percent and the median of the city changes was 27 percent. There was considerable variation across the cities, with the largest increase being 143 percent and a decline of 8 percent on the other end of the scale. The changes for the 25 cities in shown in Figure 1.

Figure 1. Change in Residential Market Value 2007 to 2016.

On the commercial side, the total change for all 25 cities combined was 43 percent. The average of the city changes was 76 percent and the median was 43 percent. There was a very wide range of growth rates across the cities. The largest increase was 533 percent and the smallest increase was 16 percent. The change in commercial market value is shown in Figure 2.

Figure 2. Change in Commercial Property Market Value 2007 to 2016.

Change in Commercial Share of Market Value

Between 2007 and 2016, most cities saw the share of total market value in commercial property increase. That is, commercial property grew in importance compared to residential property. The average change for the 25 cities was a 5-percentage point increase in the share held by commercial property. The median increase was 3-percentage points. The largest shift was a 26-percentage point increase in commercial property’s share of total market value. The largest decrease in share of commercial property was 1 percentage point. The change in the share of property values in commercial property are shown in Figure 3.

Figure 3. Change in Commercial Property’s Share of Total Market Value 2007 to 2016.

Dallas County Property Tax Base Structure

Posted on by

Introduction

We continue our series on the property tax in 25 cities that are primarily in Dallas County. This week, we look at the structure of our cities’ tax bases. That is, how it is distributed in terms of residential and commercial tax base and the extent to which cities have exempted their tax bases for various policy reasons. We are presenting the data from before the start of the Great Recession, 2007. The structure of the tax base can have important impacts on the behavior of local governments. Next week we will look at how these cities’ tax bases changed since 2007 by adding in the data for 2016.

Market and Taxable Values

Taxable values are what counts for delivering local government revenue. Taxable value can differ from market value because of exemptions that local governments offer. These include homestead exemptions and tax freezes on single family residences and various economic development abatements on commercial property, among others. Because each city council sets these exemptions, we can expect the taxable share of property to differ from city to city. This is the case. Figure 1 summarizes the situation for the combined tax base of all 25 cities.

Figure 1. Taxable Share of Different Sectors Varies

When looked at individually, our cities have total taxable values, as a percent of total market value, that range from a low of 68 percent to a high of 93 percent. The average of the 25 cities is 85 percent and the median is a little higher at 87 percent. Figure 2 compares the taxable shares of market value for the 25 cities.

FIgure 2. Taxable Portion of Real Estate Varies by City

The property tax rolls are summarized into three broad categories of property: real commercial property and real residential property include land and improvements (buildings.) The third category is business personal property, which is other income-generating property.

Just as cities present different overall taxable shares, the fraction of property that is considered taxable across property types differs even more. For commercial real property, there is a very wide range. The low and high percentage that is taxable runs from 37 percent to 93 percent. The average taxable amount for commercial real property is 74 percent and the median is 79 percent.

For business personal property, the range is from a low of 53 percent to a high of 100 percent. The average and median percentages are 90 and 97 percent, respectively.

Finally, for residential real property, the share that is taxable varies from a low of 72 percent to a high of 98 percent. The average rate for all cities is 88 and the median is 91.

Share of Tax Base by Sector

Our cities tax bases show different concentrations of commercial and residential. This is because business and residential activity is not uniformly distributed across the region. There are major business centers in the county, such as downtown Dallas, Richardson and Irving. Cities without such a business center or that lack significant highway frontage will have relatively small business tax bases. This means that the residential segment of the market will have to shoulder the burden of supporting property taxes.

The share of commercial real property ranges from 5 percent to 68 percent. The average is quite low at 28 percent. The median share is 26 percent. Business personal property is roughly, but not perfectly, distributed where the commercial real property is located – with an 82 percent correlation between the two.  To get a truer comparison of residential and commercial tax burdens should combine commercial real and business personal property. When we do that, we see that the total share of the tax base in these combined sectors runs from 7 percent to 86 percent, quite a wide range. The average share for these two combined is 41 percent, with a median of 39 percent. So, in general, our cities have more of their tax base in residential property than in commercial property. Actually, only eight of the 25 cities have a majority of their property tax base in commercial property.

Necessarily, the residential tax base makes up what is left. The range runs from a low of 14 percent to a high of 93 percent. The average for all the cities is 59 percent. The median is 61 percent.

Figure 3 shows the share of taxable value that is commercial + business personal property and residential real.

Figure 3. Cities Differ in Their Commercial and Residential Mix

This is the tax base structure our 25 cities had on the eve of the Great Recession. This is what their management and councils had to work with as local property markets began several years of declines. In many cases, the local choices were influenced by these tax base differences. Next week we will see how these cities’ tax bases had changed by 2016 and several years of recovery.

Tax Base in Dallas County Cities

Posted on by

Introduction

Last week we looked at historical changes in the tax rates of 25 cities that are all or primarily in Dallas County. This week we review changes in the tax bases of those cities since before the Great Recession. The cities included in this analysis are: Addison, Balch Springs, Carrollton, Cedar Hill, Cockrell Hill, Coppell, Dallas, DeSoto, Duncanville, Farmers Branch, Garland, Glenn Heights, Grand Prairie, Highland Park, Hutchins, Irving, Lancaster, Mesquite, Richardson, Rowlett, Sachse, Seagoville, Sunnyvale, University Park and Wilmer. These cities vary dramatically in size. Though all saw their tax base grow, their performance also varied. Much of the growth in recent years was making up for loses following the Great Recession.

Total Tax Base

These 25 cities had a total taxable value of over $238 billion in 2016. This was a $57.2 billion increase over 2007 when their combined tax base was $183.7 billion. That was the year before the financial crisis and the beginning of the Great Recession. That change represents a 32 percent increase.

These cities vary in size, with 2016 tax bases ranging from $93 million for the City of Cockrell Hill to almost $109 billion for the City of Dallas. The five largest cities account for 72 percent of the taxable value in 2016. It takes the 14 smallest city tax bases to account for 10 percent of the total taxable value.

Changes in Tax Base

There are three benchmarks that we can use to evaluate the changes in individual city tax base since 2007. First, the absolute change in total taxable value for the entire county was 32 percent. The larger cities have a major influence on this total change. Indeed, the average change for the five largest cities was also 32 percent.

The average of the changes for all 25 cities was 45 percent. The slowest growing city saw an increase of just 3 percent, in Mesquite. The fastest growing city, Wilmer, had an increase of 308 percent over the period.

A final comparative metric is the median change, which was 27 percent. This implies that half the cities saw their tax base grow faster, and half grew slower than 27 percent.

Figure 1 shows the 25 cities in order of their percentage increase. Most cities had growth rates below 50 percent. The 45 percent average is pulled up by the very high growth rates of several small cities.

Figure 1. Percent Growth in Tax Base for Cities in Dallas County

 

Figure 2 keeps the same order for the cities, but shows the absolute increase in tax base. Figure 2 puts into perspective that the City of Dallas, as by far the largest city, has contributed the most to the total increase. The City of Dallas accounted for 44 percent of the total growth of the 25 cities. Irving and Richardson saw the second and third largest tax absolute growth in tax base.

Figure 2. Absolute Growth in Tax Base for Cities in Dallas County

Decline and Recovery

Comparing the difference between 2007 and 2016 misses the important changes that happened annually after the economic downturn. During this interval, these communities actually experienced four years of declining tax base after the onset of the Great Recession. The tax base in the Dallas County portion of these cities fell an average of almost $5 billion each year between 2008 and 2011. This was followed by growth in tax base for the last five years. Forty percent of the growth in the last five years was simply making up for lost tax base from the Great Recession. The annual changes for the Dallas County portion of these cities is shown in Figure 3.

Figure 3. Total Change in Tax Base for Dallas County Cities

*Includes the Dallas County portion of the 25 cities. Small sections of several communities are located in surrounding counties.

Next week we will continue our examination of the property tax base and rates for our Dallas County cities.

Property Tax Rates in Dallas County Cities

Posted on by

Introduction

Tax rates are probably the most important policy decision a city government can make. These rates determine the scope and scale of the city services that the community can afford. The needs of businesses and households differ, and those tax rates are an important signal to them about the type of government services and level of operations they might expect in that community. The property tax is especially important in Texas. This post will summarize how the property tax rates of cities in Dallas County have changed over the last two decades. Tax rates have generally increased in Dallas County, but these increases have been concentrated in some cities and happened during certain periods.

Setting Tax Rates

According to the Texas Municipal League, 89 percent of cities and towns in Texas impose a property tax. This tax accounts for 41 percent of all municipal revenue in the state. The property tax is the most flexible revenue source available to a municipality. The city council may set a tax rate without the need for a referendum. Case law has also shown that the property tax rate, if imposed according to state law, is not subject to repeal by any voter initiative. Before imposing a rate, the city council must approve a budget that reflects a property tax. Upon adoption of that budget, the council votes to set a tax rate. As long as the annual increase in that tax is less than 108 percent of the effective tax rate, the levy is not subject to potential voter challenge. The effective tax rate is the rate that would bring in the same revenue as last year given the changes in appraised values. Senate Bill 2 is now under consideration by the Texas House of Representatives and would reduce the trigger for a roll-back election to 105 percent.

The maximum tax rate a city may impose varies according to its classification under state law. Home rule cities, essentially those operating under their own charter, may impose a rate up to $2.50 per hundred dollars of property value. We are not aware of any city in the state that has imposed a rate anywhere near that level. Most cities have rates that are less than a third of that.  General law cities, depending on type and population, have various maximum rates: Type A over 5,000 population, $2.50, under 5,000 population, $1.50; Type B, 0.25; Type C cities’ maximum rate varies between $0.25 and $2.50, depending on population.

The Data

The following analysis is based on tax rates for the 25 cities that are primarially in Dallas county. These cities are: Addison, Balch Springs, Carrollton, Cedar Hill, Cockrell Hill, Coppell, Dallas, DeSoto, Duncanville, Farmers Branch, Garland, Glenn Heights, Grand Prairie, Highland Park, Hutchins, Irving, Lancaster, Mesquite, Richardson, Rowlett, Sachse, Seagoville, Sunnyvale, University Park and Wilmer. Portions of many of these cities lay in surrounding counties, but they are required to impose a uniform tax rate on all their jurisdiction. The same tax rate applies to all property types: residential, commercial and personal property. We obtained historical tax rates from the Dallas Central Appraisal District for 1998 to 2016. These tax rates were in effect for the fiscal years immediately following. For example, the 2016 tax rate was used to collect property tax revenue for the fiscal year that ends in September 2017.

Changes in City Tax Rates

In Dallas county, property tax rates are generally higher today than in 1998. The average tax rate in 1998 was 0.5772. The average rate in 2016 was .6677. This amounts to an increase in the average rate across all cities of 9 cents per $100 in property value. The median tax rate, that is the rate of the city with the middle tax rate, grew about 8 cents over the period.

This growth was not uniform. The pattern of increase since 1998 is a stair step. Tax rates increased after the 2001 recession and remained level until the Great Recession, when they increased again. This is evident in Figure 1, which shows the median tax rate over the period.

Rates increase after recessions in 2001 and 2008.

The property tax base responds slowly to economic recessions. As the economy declines, appraisals tend to take several years to fully reflect the impact of the downturn. When we look at the five years following the last two recessions, we can see how these Dallas County cities responded. Five years after the 2001 recession, 12 of the 25 cities in Dallas county had higher tax rates compared to the year of the recession. These cities increased their rate by 7 cents on average. Five years after the Great Recession, 18 of 25 cities had higher rates five years later. Their average increase was 8 cents. This is similar to the pattern nationally, where cities struggled with declining appraisals for three years following the end of the recession.

Another interesting feature of this data, is that the difference between the highest tax rate and lowest tax rate each year also increased, especially after the Great Recession. See Figure 2. This gap became dramatic in recent years and probably reflects a combination of factors and sharp tax rate increases in just a few cities.

The range in tax rates across cities has increased in recent years.

Tax rates have changed in Dallas County for many reasons. In some cases, increases in tax rates were a response by cities to recessions. Many of these cities also decreased the rate of growth in their budgets and cut many programs. In other cases, taxes were increase to accommodate higher debt loads. Most cities in Dallas County are relatively mature and have streets and water mains that are reaching the end of their useful life. Decisions about operations and infrastructure will continue to weigh heavily on local leaders.

Next week we will look more closely at the tax base of these cities to better understanding reasons for these tax rate changes.

Texas Property Tax: The Big Picture

Posted on by

Introduction

This month, we will take an in-depth look at property taxation in Texas. The property tax is the most important source of revenue for Texas cities, accounting for almost half of municipal revenues. The property tax is the primary local revenue source for local school districts. This time of year, property owners will receive their appraisals from their local central appraisal districts’ (CADs.) A certified tax roll will be delivered to local governments in July. That tax roll will be used by city councils, school boards, county commissioner’s courts and various special districts to set property tax rates for the upcoming budget year. This week, we will provide a high-level review of property taxation in Texas for local leaders. In following weeks, we will examine trends in property tax based and rates in the DFW area and methods for forecasting property tax revenues.

History of Property Tax in Texas

Josh Haney provides an interesting history of the property tax in Texas. This tax, in place since before Texas independence was a huge source of both state and local revenue. For much of early statehood it amounted to more than half of state revenues. With local responsibility for administration, tax appraisals varied wildly from community to community. A standardized system, that ended state use of the property tax, also created the local appraisal districts in 1982. This gave us the current form of property taxation still in place today, though numerous statutory and constitutional changes have refined it.

Tax Year Cycle

The property tax cycle can be divided into four phases. Appraisal districts are required to appraise properties based on their value as of January 1 each year. CADs generally complete this process by the end of April and notify property owners of their appraisals. The CAD will also provide local jurisdictions with this preliminary information by the end of April so cities, counties, school districts and special districts can draft their budgets for the following year. This information informs decisions for operating and capital budgeting. Next, property owners can protest their appraisals. Appraisal review boards will complete these disputes by July. CADs must provide local taxing jurisdictions with a certified property tax base roll by July 25th. This value will be used by local governments to finalize budget preparation and set a tax rate. Local governments must set this tax rate after approving the budget and before September 30. The final phase of the tax year begins on October 1 when tax bills are mailed to property owners. Payment is delinquent on February 1 the following calendar year.

Truth in Taxation: Effective Tax Rate and Roll-Back Rate

The concept of truth in taxation, embodied in the Texas Constitution and state law essentially permits taxpayers to assess their property tax burden and influence the local political process that sets budgets and tax rates. The effective tax rate and the roll-back rate are important concepts under truth in taxation.

The effective tax rate is a hypothetical tax rate that would bring in the exact same amount of revenue as collected by local government in the previous year. This rate can change from year-to-year because it depends on changes in appraised values of existing property. If previously existing property appraisals are higher, then the effective tax rate will be lower than last year’s official tax rate. If property appraisals have fallen, such as during a recession, then the effective tax rate will be higher than last year’s official tax rate. The rate is calculated by excluding the value of new real estate constructed during the previous year.

The roll-back rate is a buffer to growth in property taxes that can be implemented by local taxpayers. It reflects the maximum tax increase a city government can adopt for its upcoming budget year without risking a roll-back election. According to the Texas Municipal League, there are half a dozen roll-back elections annually and a small majority are successful in rolling back the tax rate. The roll-back at the time of this writing is 108 percent of the effective tax rate. That means, that a city council can chose to adopt a property tax rate that is equal to or less than its effective tax rate without risk of a roll-back election. Rates set above 108 percent of the effective rate can trigger a citizen petition to call a roll-back election. Proposed legislation in the 2017 Texas Legislative Session would change the roll-back rate to 104 percent and make a roll-back election mandatory, without a petition.

In addition to excluding newly constructed property from the calculations, the effective and roll-back rates only apply to the portion of the tax rate that supports general government operations. The fraction of the tax rate that supports debt service (called interest and sinking or I&S) is not subject to the roll-back provision.

Statewide Trends in Property Values

Property taxes are generally calculated at the local level, by appraisal districts, for each taxing jurisdiction in the state. Changes in property tax bases can vary dramatically from community to community depending on local economic conditions. Given the overall importance of the property tax to local governments, we would like to have some baseline to easily compare tax base performance across the state. The Texas Comptroller provides us with a reasonable metric. It is charged with evaluating the appraisals made by local CADs for all the independent school districts in the state. The primary purpose of the property value survey is to support calculation of state funding formulas for K-12 education. It is not comprehensive, but provides some details to study statewide property tax base trends.

Based on these reports, between 2011 and 2016, the total taxable value of real and personal property in Texas grew 32 percent from $1.7 trillion to over $2.2 trillion. The annual increase was relatively consistent each year at over 5 percent. By comparison, for single-family homes, the statewide total has grown by 39 percent over the same period. Home property values, presented an increasing growth rate in recent years. This seems to reflect home price increases we have seen throughout the state. Annual increases in the last three years have exceeded 9 percent. Next week we will expand our analysis and take a closer look at DFW cities.

Economics and Politics of Property Taxes

Posted on by

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.