Texas homeowners won’t be surprised by this ranking. Why are property taxes so high?
In Theresa Riley’s family, property has always been seen as a good investment.
Her father started buying property in the 1980s, and now Riley helps her family manage 20 rental homes in the Fort Worth area. But as rapidly rising property values have increased taxes over the years, Riley knows people run out of options as rent and taxes go up.
“Average people don’t have cost-of-living raises,” Riley said. “It’s pretty rough on them.”
Riley has had to raise the rent to help offset higher property taxes — a cost not every tenant can afford. She’s felt the pressure firsthand, too.
When she bought a larger house on Lake Worth, her bills skyrocketed. She has protested her appraisals to keep taxes down. But her property tax bill was about $13,500 this year, up $788 from 2018, according to Tarrant County’s property tax records.
Officials like to credit the state’s lack of a corporate or personal income tax for making Texas one of the best states for business, but skyrocketing property values have given it a less-desirable ranking: one of the highest effective property tax rates in the nation, according to various studies and a Star-Telegram analysis.
The state’s effective property tax rate — described as the average property tax as a percentage of the average estimated market value — trailed only New Jersey and Illinois in 2018, according to Attom Data Solutions, which tracks property, deed, mortgage and tax data nationwide.
In another study, Texas’ metro areas had some of the highest effective tax rates out of the 50 largest cities nationwide. Half of the top 12 cities were in Texas, with Fort Worth ranked sixth, according to a June report by the Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence comparing 2018 property taxes.
Without an income tax, sales and property taxes tend to be higher to make up the difference, so it shouldn’t be a surprise that Texas would have higher property taxes compared to other states.
Think of it like a stool, with each tax making up a leg.
“Most states have a three-legged stool, and it’s a lot more stable,” said Dick Lavine, a senior fiscal analyst with the left-leaning Center for Public Policy Priorities in Austin. “There’s no perfect tax, but you have advantages and disadvantages of sales and property and income that balance out. “
Said Janelle Cammenga, an analyst at the Center for State Tax Policy with the Tax Foundation, a conservative think tank in Washington, D.C.: “Texas has always been a state heavy on local control, and property taxes are the primary source of local funding. So this means they’re more important than they might be in other states.”
But Texas stands out for high residential property taxes even among the other states that do not collect an income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington and Wyoming. (New Hampshire and Tennessee tax interest and dividend income. New Hampshire exempts the first $4,800 for couples, and Tennessee does the same for the first $2,500. New Hampshire collected about $105.8 million in interest and dividends tax in 2018, and Tennessee — which plans to phase its tax out by 2022 — took in roughly $246.5 million.)
So why are Texas’ property taxes so high?
It’s complicated.
Every state is different. Those differences include everything from other taxes the state collects, to population growth rates, to how generous a state is with its tax breaks.
For many of the states without an income tax, revenue is generated through industries that call their state home.
“A lot of them have special cases, where Wyoming has coal and Nevada has gambling and Alaska has oil,” Lavine said.
Alaska’s local governments rely heavily on oil and gas property for their property tax revenue, which has caused revenue issues as the price of oil declines, according to the Lincoln Land Institute. For example, Alaska collected $120.8 million from its oil and gas property tax in 2017.
Texas is the nation’s largest producer of oil and gas, and its production generated more than $3.2 billion in taxes in 2017. That revenue is split between the state’s savings fund, a fund used for highway construction, and the Foundation School Program — the primary way state aid is distributed to public schools.
Roughly half of the tax revenue generated in Texas in 2017 came from property taxes, and a quarter came from the sales tax, according to the Texas comptroller.
Compare that to New Hampshire, where the state doesn’t collect a personal income tax or a general sales tax. In 2018, roughly a third of the state’s revenue came from business taxes, while revenue from the statewide property tax made up about 15%.
Other taxes can vary widely, too. Tennessee has the highest combined state and local average sales tax in the nation at 9.47%, according to the Tax Foundation. Washington’s 9.17% ranks fourth, as does its gasoline tax of 49.4 cents per gallon. For comparison, Texas’ sales tax ranks 12th at 8.19% and its gas tax is 44th at 20 cents a gallon.
Considering the other levies helps put the property taxes in perspective. Texas ranked 29th in 2016 for state and local taxes per capita at $4,020, according to The Tax Foundation. New York ($8,957) was No. 1, followed by Connecticut ($7,220) and New Jersey ($6,709).
Growth increases values, taxes
Rapid population growth plays a role in Texas’ property tax bills. Out of the nation’s top 10 counties that added the most people in 2018, four were in Texas, according to the U.S. Census Bureau.
Dallas-Fort Worth added the most in the U.S. last year, with the addition of 131,767 people.
And with that growth comes the need for more teachers, police officers and other services.
“It’s a good problem,” said Lavine, with the Center for Public Policy Priorities. “In the long term we’re better off, but only if we can meet the needs of the new people being born or moving to the state.”
More people also means a greater demand for housing, which pushes up prices, said Chandler Crouch, a Fort Worth real estate agent.
“The property values in Texas have increased significantly, because more and more people are moving to Texas,” Crouch said. “It’s just a function of supply and demand.”
In the last decade, the median home value has increased in the Dallas-Fort Worth area by nearly 69% to $245,100, according to Zillow.
The property tax, based on appraised value, goes along with that increase. And if your income hasn’t increased, you’re going to feel that pinch.
Dallas-Fort Worth property taxes increased by an average of 8% from 2017 to 2018, compared to the national average of 3%, according to Attom Data Solution’s 2018 analysis.
A small upside is that homeowners with high property taxes may have more wealth than they realize, said Seth Giertz, an associate professor of economics at the University of Texas at Dallas.
“It’s not liquid, and that could cause financing problems for them and could be out of step with their income. But on the other hand, it is a reflection that their investment has done very well,” Giertz said.
Property tax relief
Because property taxes are levied at the local level, state lawmakers have fewer options to ensure you see some relief.
“They’re very, very limited,” said John Kennedy, a senior analyst with the Texas Taxpayers and Research Association, which represents businesses. “This is a very diverse state. Property taxes are very local in nature.”
The school finance system is one option to lower property taxes.
“That’s a shared state-local funding system. And the more money the state puts in, the less money that is required at (the) local district level,” Kennedy said.
Lawmakers contributed more to schools this past session with House Bill 3, which allocated about $6.5 billion more toward public education and $5.1 billion to cut school district taxes. But because of increasing property values, many Tarrant County homeowners did not see a large reduction in their school tax bill.
“So the question is, is that sustainable?” Lavine said. “It may be a one-trick pony. When they come back next session, they may discover that they don’t really have revenue necessary to keep all their promises.”
That could happen in an economic downturn. Lawmakers faced a shortfall in 2011 following the Great Recession. They cut spending by $15 billion, and local school districts asked voters for tax increases to offset a $4 billion shortfall in state funding.
So where could lawmakers possibly find additional revenue to lower property taxes?
A proposal during the last legislative session to raise the state sales tax from 6.25% to 7.25% to lower property taxes had mixed support.
Instead, Lavine said, the state could broaden the base by applying the sales tax to more services, like those offered by lawyers and accountants.
“We know that the sales tax still reflects its origins in the mid-20th century, when there was a manufacturing economy. So it’s focused more on taxing goods than it is taxing services, which is obviously what the 21st century economy is about,” Lavine said.
Another possibility would be re-evaluating exemptions.
The Texas Economic Development Act, often referred to as Chapter 313 for its place in the tax code, allows school districts to grant tax incentives to attract businesses. The program is set to expire Dec. 31, 2022.
In 2019, the Comptroller’s office estimates $584.9 million in revenue will be lost due to the program, and anticipates that number will rise to over $1 billion by 2023.
“A school district needs a certain amount of money,” Lavine said. “If they can’t get it from the industry they just gave the tax break to, they’ll get it from everybody else in town, which is mainly homeowners.”
In 2017, Nathan Jensen, a professor of government at the University of Texas at Austin, researched 257 Chapter 313 projects and found that 85% to 90% would have invested in Texas even without the incentive program.
“These findings suggest that a large majority of the 313 projects provide zero net benefits to the state,” his report read.
Also, some states have circuit breaker programs, which allow them to offer property tax relief to those with lower incomes.
But a similar program would be difficult for Texas without a personal income tax, Kennedy said.
If property taxes keep increasing, Crouch, the real estate agent, said he anticipates lower rates of home ownership and accelerated urban sprawl as homeowners move toward more rural areas.
Ultimately, the No. 1 step a homeowner can take: protest the appraisal.
“And then go to city council and the school board and talk about what services you want and how much you’re willing to pay for them,” Lavine said. “That’s the real bottom line.”
This story was originally published November 11, 2019 at 6:00 AM.
