Popularity Has a Price
Rising Popularity May Equal Rising Property Taxes
by Kay Bell and Jay Kanter
Learn the three main methods used to value property in Texas and how to appeal a value that is simply too high.
Texas’ booming economy means it's winning the popularity contest for business and as a result people are flocking to our yellow rose like the worker bees they are. Business is indeed booming which has increased the demand for housing, storage and everything else needed to accommodate everyone. Naturally, with such high demand, prices go up. All the new residents have created a demand for real estate. That's great for sellers, but for many homeowners and businesses holding onto their property, the resulting valuation increases have led to some skyrocketing property tax bills. An analysis by the Lincoln Institute of Land Policy of 2013 real estate taxation found Texas' property tax rates were the fourth highest in the United States and about 58 percent above the median rate for all states. Another study, issued in 2015 by the Tax Foundation, placed Texas sixth nationwide in property tax rankings. Comparisons of state real estate tax rates by CoreLogic in 2016 and WalletHub.com this March ranked Texas fourth and sixth, respectively.
Primary Revenue Source
Why does Texas have such relatively high property taxes? "We don't have an income tax," says Jay Kanter, principal of the Dallas-based Realty Tax Consultants, LLC.
Texas has what Kanter calls "somewhat of a corporate income tax" in the form of its franchise tax. "It's pretty healthy as far as bringing in income," he says, but not enough of a tax to dissuade relocating businesses. "Most business owners who come here don't seem to mind," says Kanter, because the tax for corporations is, comparatively, not that high. "It's actually pretty low," adds Kanter, so the thinking by corporate executives is "my business can afford the tax, but I don't want to pay a personal tax. That's why we're getting so much growth." Under Texas law, the same tax rates are applicable to all real property. "Businesses pay the exact same rate as residential property owners," says Kanter. "There is no variance in rates for businesses."
In addition, what the state calls business personal property (BPP) is subject to an added property tax. These are items in use at the business. Companies pay tax on BPP on the market or replacement value at the same tax rate as assessed real estate. "In other states, it's called tangible property tax," says Kanter. "We call it personal since the property can be moved." Common taxable items in this category include computers, desks chairs, year-end inventory and monument signs. Some industries, he notes, can have quite a bit of expensive business personal property, such as oil rigs, trucks and airplanes. "Most self-storage facilities don't have an abundance of personal property: computers, filing cabinets, various tools, a golf cart, etc. Generally, $15,000 is the max value aside from a monument sign," says Kanter.
Most Hated Tax
While Texas' overall property tax rankings, both in rates and median tax amounts, have held relatively steady over the past few years, there are parts of the state where housing is now at a premium. And many owners complain they are being tax-priced out of their properties. And as the residential property tax and valuations rise, business valuations go along with it. It's not an unusual complaint. Nationally, property taxes are regularly named as the most-hated tax. One reason is because they are so common. Property taxes are the largest source of revenue raised by local governments. The way property taxes are calculated often causes confusion. Add to the mix the volatility of real estate and the lag time of some property appraisals, and you have the perfect tax storm.
In the end, the two main factors, at least for property owners, is their real estate's value and the tax rate applied to that value.
Where property values are high, taxing jurisdictions can impose a lower tax rate and still raise at least as much revenue as a locale with low property values and a higher tax rate. But the devil is in the details of balancing those two components.
Although property taxes are levied by local governments, Texas state lawmakers have tried for years to limit them.The most notable initiative occurred in 1979, when the Texas Legislature approved a measure spearheaded by Rep. Wayne Peveto of Orange to standardize the administration of local property taxes. Peveto was concerned that some taxing districts had not reappraised property within their borders since their inception. Others, however, had reappraised more recently, and thus appeared richer than they actually were when compared with districts that had not reappraised.
At the time counties, cities and school districts each appraised separately and there was no uniformity in how appraisals were carried out; nor was there a standard for appraisers' qualifications. "There was not even uniformity as to what types of property were placed on the tax rolls," wrote Peveto in an article published in the August 1995 issue of the Texas Comptroller's Fiscal Notes. "Some school districts taxed chickens; others taxed cars; others taxed only real property." Enactment of the Peveto Bill, as it became known, made the property tax system more consistent across Texas. It separated appraisals from tax collection by creating a system of countywide central appraisal districts. Additionally, property had to be assessed at full market value and reassessed at least once every three years.
But, Kanter points out, those assessments are only part of the process. "Values have increased significantly. Taxes are going to rise with that," he says. "Nobody should be unhappy about the increase in values. What they should be unhappy with is [that] local tax rates don’t get lowered even when values rise."
Reining in Property Taxes
Some Texas lawmakers say they've heard the unhappiness of property owners about their increasing real estate taxes. And while the setting of actual property tax rates is left to local officials, a measure to reduce annual increases is under consideration during the Legislature's 85th session. The key and most contentious provision in Sen. Paul Bettencourt's (R-Houston) S.B. 2 would prevent taxing jurisdictions from increasing property taxes by more than a certain percentage cap each year unless the hike was approved by voters. A companion bill has been introduced in the House by Rep. Dennis Bonnen (R-Angleton). The property tax limitation effort has the support of Lt. Gov. Dan Patrick.
Cities, counties and law enforcement agencies that serve those areas are leading the fight against the tax limitation bills, which they say will provide minimal tax relief to most property owners while decreasing funding for critical city and county budget items. "The largest budget item for every city in Texas is public safety – police, fire fighting and emergency medical services," said Bennett Sandlin, executive director of the Texas Municipal League, after Bettencourt announced his bill last year. "Politicians can’t proclaim their support for first responders and then turn around and vote to restrict the funding that pays for the salaries, equipment, vehicles, health insurance and pensions of the men and women who protect our communities." City officials also argue that the first items to be cut from city budgets would be economic development incentives and city funding for state highway projects leading to fewer jobs and more traffic congestion.
Regardless of what happens at the state capitol, property owners likely will still complain about property taxes, especially as long as the state's financial outlook remains healthy.
"Property appreciation in Texas is because of a good economy," says Kanter. "We wouldn't have this growth if we had an income tax, and from that standpoint we're all benefitting. Whatever we pay in property tax, we're more than compensated for when we ultimately sell our property provided values stay strong."
Appealing Property Values
Some valuations have jumped dramatically leaving some owners scratching their heads. Don Clauson, owner of Lockaway Storage, owns many facilities in San Antonio. Bexar County has been one of the areas in Texas hit the hardest with high valuations. “Prior to 2015, we never litigated a property tax bill. We sat down with the assessor and were able to reach a fair agreement. Starting in 2015, they have been unwilling to move off of onerous numbers and unwilling to reach an agreement. The appeal process no longer works. Every one of our properties will be under litigation in 2016.”
Some owners use a service rather than try to do it on their own. Mike Eckhoff with Assessment Advisors in Houston represents many self-storage owners with their litigation.
Property valuations will continue to rise as long as we have a good economy and demand out paces supply. But, paying attention to those increases and knowing what other area facilities are valued at is helpful to know in determining whether or not it’s worth it to hire outside help.
Texas state law recognizes three common methods to value property:
1. Market Data Comparison Approach: Most appropriate for single-family residential properties, this approach compares a home's characteristics with those of similar homes recently sold.
2. Income Approach: Most appropriate for commercial properties, this approach relies on an estimate of what an investor would pay for the property in anticipation of future income that it may generate.
3. Cost Approach: Often used for types of property that are not frequently sold or are under construction, and in cases in which Central Appraisal Districts (CADs) cannot obtain sufficient data on sales and income, this approach relies on an estimate of the cost required to replace the property, as is, with one of equal utility.
A separate appraisal review board settles any disputes between a property owner and the appraisal district regarding the appraised property value.
Source: Texas Comptroller
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