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TAXES
GOVERNMENT
Ad Valorem
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Making Sense of Taxes, Valuations, and Spending
TEXAS REPRESENTATIVE TERRY WILSON HAS ADVICE FOR LANDLORDS AND BUSINESS OWNERS TO UNDERSTAND THE WHO, WHAT, WHY, AND HOW OF “ACCORDING TO VALUE” TAXES.
Texas is rather tax-friendly overall. In 2020, the tax burden came in at just 8.18%. Property tax, or ad valorem tax, is charged by local governments based on the value of a property. It is also the most-frequently-asked issue for our State Representative, Colonel Terry M. Wilson (US Army, Retired). Rep. Wilson says, "Business owners ask me all the time what can be done about their taxes. Last session, the State Legislature passed the 'Texas Taxpayer Transparency Act' to provide individuals and businesses with tools to understand their property tax bill and to get involved before the tax rates are even set.”
SETTING THE TAXES
Texas is one of nine states that do not collect a personal income tax. Instead, local governments charge property taxes to provide local services and pay down debts. Texas does not have a state property tax and instead relies on other taxes, like sales and use tax, to generate state revenue. On average, about half of the property taxes you owe are paid to the local school district. You may also pay property taxes to your city, county, and special purpose districts, such as emergency services districts (ESD), hospitals, community colleges, and municipal utilities (MUD).
Each taxing entity determines your property tax bill by applying their adopted property tax rate to the taxable value of your office or rental property. Rates are set, individually, by a governing body or executive committee of those taxing entitles; e.g., City Council or MUD Board. Before setting a property tax rate, cities, counties, and school districts must propose a budget and hold a public hearing on the proposed budget, then build a budget to address everything from salaries to road repair, and decide what to charge property owners to cover those costs.
The proposed budget must be made available for inspection and posted on the city, county, or school district website. Budget discussions can start as early as January of a given year, and beginning in early August, most taxing units take the first step toward adopting a tax rate based on a certified list of properties and respective values they received from the appraisal district. By August 7th , most taxing entities will post budgets and proposed tax rates online. For Williamson County properties, information on the taxable value of property, the proposed tax rate, and the estimate of the total tax bill—if the rate is approved—is available at williamsonpropertytaxes.org.
“Budgets determine revenues, and revenues determine rates. While budget planning can be complex, it is worthwhile to attend hearings. If you believe the city should prioritize funding for infrastructure or road connectivity, ahead of updating a local park, sending an e-mail to your city council member is the best starting point.”
by Ann Marie Kennon
annmarie@wilcobr.com
This is why taxing entities have public hearings—all business owners and residents are welcome to attend budget planning meetings to hear about the needs of a county, city, school district, etc.
Rep. Wilson adds, "Budgets determine revenues, and revenues determine rates. While budget planning can be complex, it is worthwhile to attend hearings. Attend the public hearing, ask 'why' things are needed, and get the details. Your participation is integral to ensuring local budgets match local priorities and elected officials are all asking for your input.” GOVERNMENT
THE VALUES
A tax bill is determined by multiplying the total tax rate by the taxable value of the property. Taxable value is determined by looking at the property’s market value, assessed value, and any applicable exemptions.
MARKET VALUE
The Texas Constitution requires property to be appraised at its market value. Market value is defined as the price for which the property would sell between a willing buyer and a willing seller. The chief appraiser in each appraisal district is responsible for determining the market value of each property in the county as of January 1. Appraisers will review recent sales of similar properties and report those values to the Appraisal District Board of Directors.
Owners of agricultural or timberland property may apply for special appraisals based on the value of crops, livestock, and timber produced by the land. This can result in lower appraisals and lower taxes.
ASSESSED VALUE
Property values may increase or decrease each year to match the market values. Businesses and rental properties do not qualify for most exemptions, so typically, owners pay full market value for their properties.
THE RATES
The no-new-revenue tax rate is a calculated rate that would provide the taxing unit with approximately the same amount of revenue it received in the previous year on properties taxed in both years. Essentially, the taxing board is asking, “What rate will generate the same amount of revenue as last year, given that home values have increased?” This is much like determining a new monthly payment when the same car loan is distributed over a different time period; the total loan amount is the same but the monthly rate may decrease if it is spread over more months. The "No New Revenue" tax rate may or may not mean you pay the same amount of taxes on your individual property, since it is related to all properties within the district.
This process is repeated each year using the prior year’s revenue and the current year’s values.
OUR HYPOTHETICAL OFFICE...
2020: You bought a new building/office and the appraisal district determined the Market Value was $500,000 on January 1, 2020. The 2020 Market Value and Assessed Value are $500,000. 2021: The building’s Market Value increased to $800,000 but your Assessed Value would only increase 10 percent—to $550,000. 2022: The market value stays at $800,000, your Assessed Value would still increase by 10 percent to $605,000, since the assessed value is still below the Market Value.
YOU CAN REACH REPRESENTATIVE WILSON AT (512) 463-0309 SCAN THE CODE OR EMAIL DIRECT TO TERRY.WILSON@HOUSE.TEXAS.GOV
GOVERNMENT
COLONEL WILSON IS NOW SOLICITING CITIZEN AND BUSINESS OWNER FEEDBACK FOR WHAT COMES NEXT.
“For decades, the legislature balanced its books by pushing the cost of providing quality public education onto property taxpayers by way of local school districts. State lawmakers were able to raise taxes to pay for other priorities, local property owners paid the bill, and the school districts took the blame. It has taken a long time to undo that knot of political red tape, but the legislature has set the stage for the state to pony up, pay the bill that was always the state’s to pay, and finally provide property tax relief if we have the courage to get it done.”
BACKGROUND
In the 86th and 87th Legislative Sessions, House members passed bills to establish revenue and spending caps. Rep. Wilson explains, “In future, we can adjust the budget to serve more people based on population growth and inflation, but we can not spend any more, in adjusted money, than we did in previous sessions.”
The question at hand, then, is what should the State do with additional revenue—i.e., if sales tax brings in more money than required for costs—if they can not spend it?
OPTION 1: Using surplus state taxes to pay down the property tax share of School District M&O to zero.
Representative Wilson says, “We cannot just cut property taxes and tell the schools they have to deal with less funding; the state needs to find that revenue somewhere. House Bill 122—currently before the legislature—employs the same method and mechanism as HB3 from the previous session. HB3 increased the State share of school spending, which resulted in an 8¢ to 13¢ per $100 of value reduction of property taxes across the state from what they would otherwise have been.”
When sales tax revenue exceeds the State spending cap— and new spending is not allowed—HB122 proposes spending 90 percent to buy down the M&O for public schools. Most property owners pay close to 50 percent of their taxes for schools so, as the state buys down that cost, property taxes will decrease. “The goal,” Representative Wilson says, “is for the state to continue buying down School District M&O costs until the state’s share reaches 100 percent and local tax is zero. Following that, we will continue to use the surplus to buy down other taxes that contribute to school funding.”
Those other taxes include 25 percent of the tax we currently pay for gasoline, which goes toward the Foundation School Program (FSP). Once School District M&O property tax reaches zero percent, the legislature can begin buying down gasoline or other taxes. It is estimated that this buydown will take about 20 years.
This option would require a Constitutional amendment to lock it in place until 100 percent of the schools’ M&O is paid. Representative Wilson says, “This is what any state tax surplus should be about. We will not truly have a surplus until the local share of School District M&O costs is zero.” Colonel Wilson Is working hard to encourage other legislators to pass this option during special sessions. It is a baseline to do anything else and will guarantee our surpluses are spent on tax relief.
OPTION 2: This option incorporates changes from Option 1 but includes removing select sales tax exemptions.
“We currently exempt many categories from sales taxes. Some, like essential groceries and raw materials, make complete sense, while others, like boats, do not,” Colonel Wilson says. “If we pass HB122, removing exemptions would produce additional revenue that would help reduce property taxes in less time rather than go to special programs that do not have the same broad impact.”
He explains, if we put Option 1 in place and begin carving away additional exemptions, we could eliminate the School District M&O costs much sooner. He adds, “We don’t want to eliminate all exemptions, like those we have for food or school supplies. There are many exemptions to include but it is not a simple thing to ‘flip those switches’ until we can be certain the benefits will be equitable for a large part of the population.”
OPTION 3: Raising the state sales tax rate.
During the 86th session, members worked on a bill to raise the state sales tax by 2 percent, to provide for a quicker M&O buydown. The current state sales tax is 6.25 percent and, estimates show, for every 1 percent increase, the state will gain $6 to $8 billion.
Representative Wilson says, “This seems like a good plan, but many people don’t have a lot of trust that there would not be a correlating tax ‘swap.’ On the plus side, this option would also require a Constitutional amendment, which would bind future legislators to play by the same rules.”
GOVERNMENT
KEY TAKEAWAYS
Rep. Wilson wants to know what you think about the options outlined, or if you have additional suggestions. Please call or email his office as soon as possible. Email is preferred to ensure your suggestions and comments are documented. “Eliminating School District M&O property taxes will not only help homeowners, it will also make Texas an even more attractive state for industry and commerce. Instead of having to give sweetheart deals to specific companies to relocate, we can offer every business, new or existing, the benefits once offered only to companies like Facebook or Amazon. Your input will be essential to making sure we are being fair when considering the impact of these options.”
“We hope to pass Option 1 during our special sessions, and afterward begin interim studies on options 2 and 3... and maybe 4, 5, and 6, whatever others present from great constituent feedback.”
CONSTITUTIONAL AMENDMENTS ARE BINDING BECAUSE THEY REQUIRE PASSAGE BY THE PEOPLE, BY VOTE. THIS GUARANTEES A FUTURE LEGISLATURE CAN NOT "UNDO" THE CHANGE UNLESS THEY GO BACK TO THE PEOPLE TO APPROVE THE CHANGE WITH ANOTHER VOTE.
