A vital key to understanding property taxes is coming your way.
In the next few weeks local taxing units (cities, counties, school districts, special districts) will publish tax notices in the newspaper to comply with the Truth in Taxation law.
This will include their effective tax rates and rollback rates. Both are critical pieces of information to taxpayers.
Basically, the effective tax rate is the rate necessary to generate the same amount of revenue as the previous year on the same properties taxed the previous year that are still on the tax roll. It excludes new construction and new properties, and it adjusts for lost value.
The rollback rate is the rate that if exceeded would allow qualified voters in cities, counties, and water districts to petition for a rollback election. In Texas the rollback rate is the effective rate plus 8 percent, not including debt. For school districts, a ratification election is already mandatory.
Truth in Taxation dispels one of the most persistent myths of our property tax system. It’s the myth that says the benchmark for taxes is the previous year’s tax rate. Further, if local taxing units adopt a tax rate that does not exceed the previous year’s rate, they are not raising taxes. This narrative, however pervasive, is false.
There is no relation between adopted tax rates from year to year. To adopt the same tax rate as the year before is irrelevant to the calculation of taxes. The only way it would be relevant would be if other factors remained the same as the year before, but they never do.
Every tax year starts with different factors. The taxing units will consider a different budget, a different effective rate, and a different set of values. Adopting the same tax rate as the year before is merely applying an old rate to a new set of numbers. Apart from that, it’s meaningless.
The benchmark for property taxes is not last year’s tax rate; the benchmark is this year’s effective rate. A tax rate higher than the effective rate will result in an increase in taxes. That is why the effective tax rate is so important and why taxing units are required by law to publish it every year in the newspaper. Most publish this information in August before new budgets and tax rates are adopted.
The effective tax rate will change every year as the taxable value of property changes. In a normal growth economy, the effective rate is usually lower than the previous year’s adopted rate. In a stagnant economy, such as a deep recession in which values retract, the effective rate may be higher than the previous year’s adopted rate. However, it is important to remember that the effective rate is still the benchmark, no matter what the market conditions are.
Budgets drive tax rates. Typically, a budget that increases spending will require a rate that increases taxes and, therefore, a rate that exceeds the effective rate.
Although value is an important factor in the calculation of property taxes, it is not, as many seem to believe, the primary driver. Government spending drives taxes. The more government spends, the more revenue it must have. That is true at the federal level, at the state level, and, in particular, at the local level.
Taxpayers concerned about rising property taxes should contact their local officials. Call, write, email, text, utilize social media, attend budget hearings. Your locally elected officials control the last step of the process — adoption of a spending budget and a tax rate — that determines how much property taxes you will have to pay. Give them the benefit of your opinion.
Ron Wright is the tax assessor/collector for Tarrant County