How a appraisal cap works
In 1997 the voters approved a constitutional amendment, Proposition 2, to allow the legislature to limit the maximum annual increase in the taxable value (appraisal) of a residential homestead to 10 percent or more. A constitutional amendment was required because the cap is an exception to the basic requirement that taxation be equal and uniform (Art. 8, sec. 1-a, of the Texas Constitution) and that all taxable property be taxed in proportion to its value (sec. 1-b). Appraisals in each county are made by central appraisal districts, which set the appraised property value used by all local taxing units – school districts, cities, counties, community colleges, and special districts – in taxing property within their jurisdictions. Appraisals must be done at least every three years.
Limiting appraisals favors higher-income families
More than half of the benefit of the current 10 percent cap goes to families with incomes over $97,000 a year, according to the comptroller’s tax incidence study. Higher-income families live in higher-priced homes, and higher-priced homes tend to gain in value more quickly than lower-priced homes. This tendency is so strong that the one-tenth of Texas families with incomes over $136,000 reap more than 1/3 of the benefit of the current cap.
The current cap is unfair to business and renters
One problem with the current cap is that, by limiting only the value of homesteads, businesses end up paying a greater share of local property taxes. The 36% of Texas families who rent their home also have to pick up an additional share of property taxes, since they pay the tax bill of their landlord, who passes it on to them in the form of higher rents. This problem is even worse in Houston, Dallas, and Austin, where more than half of households rent their houses or apartments.
Expanding the cap to business property creates new problems
But expanding the cap to cover business property just creates other problems. The value of business property is very sensitive to changes in the economy, so tends to rise and fall much more than the value of homes. If business property that was covered by an appraisal cap suffered a sharp fall in market value, even if the value of the property quickly recovered, the cap could hold the taxable value significantly below market value for many years. Chief Appraiser Mitchell used three actual commercial properties in Dallas to demonstrate this effect. Each suffered a dramatic loss of market value, starting in the late 1980s. According to his calculations, even by 2003 these properties still had an appraised value as low as one-third of their actual market value – shifting the tax burden onto newer properties or those with less volatile values.
A cap would create dangerous imbalances in the property tax system
A lower cap on appraisal increases would create severe imbalances within the property tax system by weakening even more the link between the market value of a residential homestead and its taxable value. An artificial cap creates the “Welcome, Stranger” phenomenon. The taxable value of a homestead would be raised to its true market value when it was sold. Two neighbors living in identical houses would pay the same amount in property taxes, as long as neither moved. But if one sold his home, the newcomer (“the stranger”) would be charged taxes on the full market value of his home, while the person who did not move would pay on only a fraction of the true value. Needless to say, this would provide a real disincentive to moving into a nicer home and might discourage people from moving to Texas.
CPPP – Lower Cap on Appraisal Growth Would Benefit Mainly Wealthy Homeowners, Create Dangerous Imbalances
Code – Tax Code
Chapter – 22 Assessment
Section – 26.04 Submission of roll to governing body; Effective and rollback tax rates
Code – The Texas Constitution
Article – 8 Taxation and Revenue
Section – 1 Equality and Uniformity; Tax in Proportion to Value; Income Tax; Exemption of Certain Tangible Personal Property from Ad Valorem Taxation