Texas is considering a 2.5% cap on tax revenue collected year over year (YOY) by taxing entities (school districts, cities, counties, etc). I previously wrote a lengthy article, looking at the previous 10 years to determine what the cap would have cost Texas schools if the cap had been in place. The results were startling, with a gap created of $30 Billion from 2008–2017.
To try and illustrate how a cap like this works (and doesn’t work), I thought I’d create an example “My Town”.
My Town has one neighborhood with 100 homes in it, all valued at $100,000 each.
The My Town School District has a tax rate of 1.04 for every $100 of property valuation.
With 100 homes, all worth $100,000, that means the My Town property valuation totals $10,000,000. When I take that valuation and the My Town School District tax rate is applied, each homeowner would pay $1,040, with the school district collecting a total of $104,000 in revenue.
When we go into year two, the 100 homes in the neighborhood all appreciate 2%, and are now worth $102,000. Someone builds a new neighborhood in My Town, adding 20 homes, all worth $100,000 each. My Town School District keeps their tax rate static, at 1.04 per $100 valuation.
My overall My Town property valuation is now $12,200,000. That’s a 22% increase, based on both property appreciation and new growth.
Without a cap, and with my tax rate staying static, the My Town School District would collect $126,880 in revenue. This is an additional $22,880 vs the year one revenue, which allows the district to pay for new teachers, educational materials, etc.
When you apply the 2.5% revenue cap, you can only collect $106,600 in year two. That’s calculated by multiplying the year one amount, $104,000, times 1.025. If the district can only collect $106,600, they have to lower their tax rate to 0.873 per $100 valuation. The district now has a gap of $20,280 vs the uncapped revenue, trying to cover the growth of 20 homes with just an additional $2,600. This is where the problem hits. Would the State step in and cover the gap?
The talking points out there imply that this is a cap on YOUR tax rate, that if you had a big increase in valuations, YOUR tax increase would be limited to 2.5% if the plan was in place. There is nothing further from the truth. This is a cap on total revenue that is collected. There can be HUGE variation of valuation changes inside a district. Here is a My Town Example.
Out of the 100 homes in our neighborhood, 90 homes still have $100,000 valuations in year two. 10 of the homes have been valued at $125,000 each, a 25% increase. Do the 10 homes with higher values see their taxes capped at 2.5% increase? Nope. The overall property valuation across all 100 homes moves from $10,000,000 in year one to $10,250,000 in year two. When you apply the My Town School District’s 1.04 tax rate, the district is collecting $106,600 in revenue. That’s 2.5% more revenue than the district collected in year one. This means the cap has no impact. As the My Town ISD didn’t change their tax rate from year one, 90 home owners still pay $1,040 in taxes. The 10 home owners who saw their property appreciate will pay $1,300 in taxes, a 25% increase.
Let’s be clear. A tax revenue cap impedes growth without significant input of funds from the State to offset revenue gaps. A tax revenue cap imposed by the state creates artificial restrictions on what should be a local control issue. Local city government, county commissioners, school boards, etc, are all elected by their communities to be stewards of the community and taxpayer dollars. If the community doesn’t agree with steps their local representatives have taken, we have something called elections on regular intervals, where the community can make adjustments.
On property valuations themselves, if a community is growing, property will appreciate. Your home is worth more. Real estate is an investment. I know I bought my home expecting that it would be worth more when I decide to sell it. As it gains value, my taxes on the property should increase. When I chose to sell it, I will realize those gains in the value. That is reality all over our country. Does Texas have fairly high property taxes? Yes. Per the Tax Foundation, Texas is 6th in the nation in property taxes, but only 46th in the nation in total tax burden. We pay more in property taxes because we don’t have a state income tax. If you lived in 45 other states in the US, you would be paying more overall in taxes. Your property taxes might be a little lower, but even more taxes would taken from other streams.
There is a reason that people are still moving to Texas while many states in the US are seeing declines in population. From 2008 through 2017, Texas has seen an average of over 76,000 new children moving into our public schools every year. That’s a lot of families. As that continues, properties will appreciate. New communities will be built. Our local infrastructures, services and schools will have to keep up. Let the local markets and local communities decide what they need. We don’t need to hamstring them with revenue caps.
If you have questions / comments / feedback, feel free to reach out to me at firstname.lastname@example.org