This page is a work in progress analysis for reform of the Texas taxation situation. The goal is to identify where the spending is going, which areas better manage their resources and why, and where or why people are rightfully complaining.

Background

Why am I doing this? I am concerned that a modification to the taxing policy in favor of sales over property tax will result in damaging trade, destroy retail jobs, result in an eventual income tax, and kill our already suffering housing affordability, similar to what prop 13 did for California. Our creeping housing affordability issues appear to be more related to explosive population growth and inability of supply to keep up with demand.

For my background, I am a concerned citizen just like you. I am also one of those Constitutional-Liberty-rah-rah-give-me-my-freedom types too. I don't have an economics degree, but my background is in finding and fixing holes in corporate governance processes from an efficiency standpoint or just where people can commit fraud. I've spent about 20 years of my career doing this for all sorts of entities from governments federal and local to small businesses to multinational energy companies with hundreds of thousands of users and computers. This gives me a very wide view of governance processes in entities very large and very small.

Let me make a few cheap appeals to the authority of the founding fathers, and we can continue. Please, remember, the Boston Tea Party was a revolt against a 3% sales tax on tea! Sales tax intrudes on small businesses and makes it more difficult to startup a business, and allows individuals with lots of capital and land to escape taxation - getting the regular people to foot the bill. Don't believe me? How do you think Amazon was able to make such a killing for so long, without turning a profit? For quite awhile, Internet-based businesses didn't have to worry about sales tax for the most part - that's how.

To air my bias, I am a proponent of a taxation scheme that I believe would lower most everyone's tax bill, indirectly. It was used at the time of the Constitution until shortly before the Whiskey rebellion before Whiskey became an easy mark, politically, allowing well-to-do land interests to reduce their tax burden. In my own studies of such schemes, I have concluded that the taxation on land, ignoring improvement value, is helpful for stabling housing values, reducing sprawl, conservation, and discouraging foreign interests who may drive housing costs up. I think the system could rectify many of our government's taxing woes and lower most everyone's tax bill to boot. But, I am also a numbers guy and would like to prove the claims out through the numbers. It will take some time to complete this analysis for Texas, but for now you can debate which is more free. So long as supply exceeds demand, I think a compelling argument can be made for eliminating property tax. But, once demand exceeds supply, it creates liberty problems for people graduating school, entering the work force, IMO. Here is one key to understanding - would it be Liberty for say, one or a small number of persons to own all of Texas land? Obviously not. Do the math from there. Throughout history, philosophers, statesmen and economists have argued that the amount of land people could hold should be limited, and that privately held land should be taxed on its value. The idea behind this your Liberty ends where another's begins. When land value is sufficiently taxed, people do not monopolize land by taking more than they can effectively use.

Regardless of my bias, If we remove the property tax system, there are a number of potential replacements. The most heavily championed is a sales tax at 12% to 19% depending on which model is selected. If Amazon killed their competition from not having to pay taxes due to operating on the Internet - what would a 12-19% tax rate due to store fronts in Texas trying to compete with Amazon? They had better learn how to Internet! I will try to substantiate this claim as we proceed. All is not lost though - there may be some ways to mitigate some of the negatives of a sales tax and their impact on commerce and local retail jobs.

For the rest of you who are just sick of your tax bill being too high, please proceed to the complaints section below.

If you are more of a Facebook constitutional-freedom-ra-ra-fighter type, I have included additional thoughts and founding father quotes on the Lone Star State Tax Reform in an attempt to champion the system the founders promoted, as I believe it to be the most wise and liberty minded. I also believe it considers issues about economics neglected or forgotten by most modern economists. Most notably, you may want to consider claims that the taxation system was based on land prior to the Whiskey rebellion. Shifting the burden to Whiskey was an easy political move and in my humble opinion, broke federal taxation almost from the start. You may also be surprised to learn that George Washington, the leader who quelled the whiskey rebellion, was also the largest producer of Whiskey in colonial america shortly before he died. I'm sure these two facts are unrelated.

Let's examine some of the top complaints.

Complaints

Below are some of the top complaints I've heard so far. I'll try to treat each of these with an analysis and set of recommendations.

Unfair Annexation
Under Representation with taxing authorities
Excessive Tax Burden

Let's have a look at the multiple competing theories as to the origins of the above complaints.

Theories

Spending

Texas has in its constitution an amendment preventing ad-valorem taxes at the State level; however, this did not stop local taxing entities from implementing ad-valorem taxes. Now some districts seem to compete for the best football stadium in Texas. This may have a slight impact on the tax bill of people living in such areas.

Business Interests Shifting Tax burden to Residential?

Apparently, there was some legislation passed in Texas several years ago for business interests that:

1.) Effectively masks property value on commercial property resulting in a lowering commercial property tax rates, relative to residential. How? Apparently, commercial property values don't have to be disclosed as part of the sale.
2.) Effectively forces assessors to underestimate commercial tax liability. How? By paying legal and court costs if they lose a challenge.

If #2 above is coupled with #1, this basically stops commercial property taxes from rising and would likely shift burden to residential as authorities try to make up for budget shortfalls.

Rural School District funding Robs from Rich Districts?

It is said that some rural districts provide agricultural exemptions excessively. So long as there is a cow or two on the property, it can be justified as ag-exempt. Rural districts would be funding their schools somehow or another. But, how? Well, Texas has this robin-hood plan, whereby poor school districts are funded by richer school districts. I don't know the exact formula, but I think it was around 1/3 or so of a rich district's extra money would go to a poor school district. Ever drive around in the country and see these really fancy schools in the middle of nowhere? Maybe that explains it. From what I can tell, in a way, the poor districts are incentivized to include as much ag-exemption as possible because the rich districts will cover them. With the loss of this tax revenue, it is expected that the taxing authorities in richer districts would need to make up for the lost budget somehow. According to the story so far, the rich districts are now bearing the burden for the agricultural exemptions as well as commercial interests. I wonder who might get to pay for all those fancy schools being built in the richer districts? Do you think the taxing authorities - when given the option of budget failures and increasing debt, or not lowering the taxing rates as property values increase would choose the latter?

Well, that's one part of the story. Though it is compelling, I don't yet know if it is true. I don't even know if there is enough data to determine if it is true!

Population Growth Driven by Business Growth?

Perhaps another part of the story is that the various sweet deals the governor has been making to entice companies into Texas has resulted in an attractive job climate, which, of course, brings more people, and causes a housing shortage in some areas? This may be reflected in the overall numbers of housing permit trending upwards and the skyrocketing values of existing homes.

Population Growth in Texas driven by Shady Conditions in Other States?

Texas seems to have gained about 2 Million people from 2010 to 2015. 2 Million! That's a lot of houses to build. Texas is becoming New York or California?

Expansion of Loans for Underqualified People Resulting in Crash

Let's think back to the economic implosion of 2008 or so. As best I understand it, the federal government made it very profitable for some companies to grant housing loans to people who couldn't ordinarily qualify. This drove housing values up in many places and maybe some taxing bodies began to build some cool stuff as a result. New football fields, anyone? But then, POP, the bottom dropped out of the market. I wonder what that did to house values? Suddenly many people were without a home, and I suppose that caused an increase in available housing, dropping the values, and consequently tax revenues? If this part of the story is true, I'd expect that there would be a delayed reaction in assessments from 2008 - maybe 2-5 years, before the taxing bodies could catch up and make adjustments. Having lost all that beautiful revenue, they would need to make up for lost time.

Anyway, I am under some pressure to get this analysis completed given the pending legislation in the Texas session this year, but hopefully this at least gives people some things to think about.

Let's try and see if any of the above theories might hold water. It will be a fact-finding mission where we won't know what questions to ask until we trace through the data.

Analysis

I started by picking a county for which one individual was frustrated by the property taxation. I downloaded the data for the taxing districts which that individual may be subject to and began analysis of the rates and the values. Time permitting, I'll do some analysis of other county situations as well. First though, let's note that the Texas economy is doing well for now. Single family dwelling building permits are trending upward and multi-family dwellings are trending downward. I suppose that means demand for house construction is greater than for apartments. For Texas overall, unEmployment is trending downward, but I'll want to make sure they aren't using tricks like tossing out people that aren't working, but just gave up looking.

Jasper County Analysis

Jasper County has a rate of 0.65 [1] The rates were as low as 0.43 back in 1998, trended up to 0.70 in 2006 and have been trending down since then.
City of Jasper has a rate of 0.3182
Jasper County Water Control & Improvement District #1 has a rate of 0.293
Jasper County Emergency Services District #1 through #4 has a rate of 0.03, respectively.

What has happened to home values in and around Jasper? Have they risen a great deal or not really? Let's check Jasper CAD's website and pick a few properties at random.

This first property[2], had an assessed taxable value of 78,730 back in 2011, but by 2017 it had appraised out for 100,416. That's at least a 25% difference in value over a 5 year period. Is that unusual? Is that adjusted for inflation? Maybe we can check on some real estate websites to get an idea of what is normal.

A quick look at Jasper county population indicates that it has basically flat-lined. The property value going up isn't due to population then.

Does this property have some fancy new buildings? I'd have to look for permitting or somehow check details on past assessments to find out. Maybe there is another way - I could compare to other properties in Jasper to see if there is a similar rise in value of about 20% percent over a similar period? I could even compare over a longer period if I could find some data on it.

Let's look at another property. In 2016, the appraised taxable is 97,643, but back in 2011 it was 24,634! What in the world is going on? Did someone build a mansion between 2011 and 2016? The value doubled from 2014 to 2015!? It does look like a new house has been built on the land, but I can't say for certain.

I looked at several:

[3] - its 5 year history shows very little change in taxable appraisal value.
[4] - while there was an increase back in 2014, it has since held.
[5] - the value jumped so much it is rather obvious someone built a house.
[6] - the taxable value went down a bit over 5 years. Maybe this person did their formal property tax protests and got some depreciation points :)

What about the county budget itself? Has the budget changed significantly in Jasper County to result in a change in tax burden?

budget adopted 2013 - Jasper County was a minor increase.
budget adopted 2014 - Jasper County was an almost 7% increase.
budget adopted 2015 - Jasper County was only 0.1% increase.
budget adopted 2016 - Jasper County was only 0.1% increase.

What was with the jump in 2014? I'm not sure, but the budget seems to have remained relatively flat.

Also, note, there was a disaster declared in the county 2015 due to flooding from March 2015 to January 2016, but this didn't seem to impact the budget.

I should look at school taxes also.

Ellis County Analysis

Population grew rapidly for several years, but slowed around 2010 - 2014[7].

Let's start looking at some properties to build a story. One thing I like about Ellis vs. Jasper county website is that Ellis provides much more detail and goes further back. [8] - Someone held a tract of land for several years then built a house. Naturally, the appraisal value shot up. [9] - The Lion's share of the tax is from the school district on this one. Something else I noticed is that land value shot up quite a bit from 2012 to 2013. [10] - The improvements value doubled from 2013 to 2014. That's probably not enough of a jump to be a house. Surely not a garage worth that much? [11] - The improvements value basically doubled from 2012 to 2013. Is this the beginnings of a pattern for Ellis county? [12] - This one had a steady increase year over year, but no sudden jumps until 2016/2017. [13] - This one remained constant for all the years. [14] - This one had a jump for 2016/2017.

LVT Sample Analysis

I had mentioned that I was a proponent of taxation schemes that seem to have been forgotten. Land Value Tax is the main one. The basic idea is to tax the raw unimproved land as a sort of user's fee to compensate non-landholders for their loss of land access via your land patent. While there are a variety of land valuation schemes, the good news is that Texas already has most of what is needed in place. It may be good to pilot some alternate valuation methods in some districts. One of the simplest plans is to allow the landholder to pay the tax that he feels the land is worth - but this also opens him up to being bought out. At least he'd get the price he wanted. Regardless of which valuation method is chosen, it is surely much better than trying to understand even this solid explanation of the Texas property tax system.

Lots of times you can see the taxation policy of a place based on the construction and how well it is taken care of. The land value tax encourages folks to build or improve upon the land, whereas taxes on improvements encourage folks to find ways around the system - such as not using closets :)

To start the LVT analysis, I selected a house listed for sale and checked on its land and improvement taxes. This house in Montgomery for sale had its tax go up by 9% from 2014 to 2015. What changed in Montgomery county or did something change with the home itself? It appears that significant renovations were done on the home - driving its value up significantly in 2016, and significantly driving up the tax bill.

Under an LVT scheme, what would have happened? There would have been no increase in the taxes due to the improvements.

Recommendations

If the good people of Texas just can't resist a high sales tax in lieu of a property tax, I hope the they will try to make it friendly to new businesses somehow - perhaps giving them an initial discount for a couple years, or graduated tax rate.
One of the main problems in the current system in Texas is all of these little competing districts. This problem is compounded with all the administrative overhead. Perhaps one way of dealing with this is to collapse all these little districts into county units. This could drastically reduce the number of school districts and simultaneously all the extra overhead.
Taxing districts that are currently doing OK with managing their taxes and aren't doing nasty things like annexing folks in unfair ways could be left alone, but districts that act up could have the state brought in to baby sit if enough people complain. This would be similar to how underperforming schools get a hand from the state.
Of course, I would recommend LVT - not all at once, but gradually reduce taxes on improvements and replace with tax on land. If still unsure, try it as a pilot in a couple of districts.

Resources

http://www.taxhistory.org/www/website.nsf/Web/THM1861?OpenDocument

KSpect

Texas Tax Analysis

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