THE PROPERTY TAX FIXATION
City officials who have been keeping score realize that no fewer than four interim committees of the Texas Legislature are studying property tax appraisals, rate-setting, or revenue limitations. In 2006, as a prelude to the 2007 legislative session, two interim legislative committees and a special task force appointed by the governor studied appraisals and property tax “truth-in-taxation.” It is probably not an exaggeration to say that in recent years no subject has been examined by more state-level committees and task forces than has the local property tax.
Why is there so much unrest concerning the property tax in Texas? How does one account for continuous calls to reduce, cap, or even eliminate the local property tax? The answer is simple: the property tax burden in Texas is relatively high in comparison to other states. But why is that the case?
The answer to that question is a bit more complicated, but at the root of the problem are two, interconnected fiscal realities.
- The State of Texas relies heavily on local governments to generate the tax revenue needed for public goods and services. (See the accompanying chart.)
State and Local Government Tax Revenue, 2005* U.S. Texas Per capita state and local $3,705 $3,026 (37th) Per capita state $2,364 $1,563 (49th) Per capita local $1,515 $1,591 (13th) % local 40.9% 52.6% *2005 is the most recent year for which these figures are available. The school finance reforms of 2006 have undoubtedly changed the figures somewhat.
Texans have long known this is true with regard to public schools. (In fact, the paucity of state funding for public education has resulted in periodic lawsuits against the state.) But it is also true with regard to city services and facilities. Unlike other states, Texas provides no general purpose state aid to cities to help pay for streets, public safety, or any other city service. The state forces cities to generate their own revenue. That’s why (as the chart shows) per capita state tax revenue is relatively low, while per capita local tax revenue is comparatively high.
But the chart focuses on “local governments” (cities, counties, schools, and districts). What about cities only? For this information we turn to a new publication of the National League of Cities (NLC), “Cities and State Fiscal Structure.”
One section of this report tabulates, for each state, a statistic the authors refer to as “own-source capacity.” This is a measurement of the extent to which decisions made by city officials actually determine the city’s fiscal direction. Since it has long been known that Texas cities take care of themselves without intergovernmental aid, it comes as no surprise that Texas leads the nation in municipal own-source capacity.
The flip-side of that coin, however, is the report’s measure of state aid to cities. Here again, the NLC report replicates previous research: Texas trails only the state of West Virginia in state aid—the share of municipal revenue that comes from state government sources.
These two findings of the NLC report once again establish these facts: (1) the State of Texas relies very heavily on Texas cities to generate the revenue necessary for municipal facilities and services; (2) the state gives cities the capacity to generate that revenue; but (3) the state gives cities virtually no state financial aid. - In addition to forcing local governments to generate comparatively large amounts of tax revenue, the State of Texas also forces those local governments to rely too heavily on the property tax. It does this by denying them other revenue sources. This is especially true for public schools, which rely almost exclusively on the property tax. But it is true for cities and counties, as well. In fact, of the $1,591 shown in the accompanying chart as per capita local government tax revenue in 2005 in Texas, a whopping $1,325 (83.3%) came from the property tax!
These two fiscal conditions, which create the property tax mess in Texas, are unlikely to change unless the State of Texas takes one (or both) of two actions:
- Inject more state money into public services and facilities, especially public schools. This means even more state revenue than was provided through the public school funding reforms of 2006.
- Open more revenue sources for counties and cities.
Any other attempts to reduce the property tax burden in Texas will either be ineffective or will create unintended, negative consequences.