Analysis: Property Tax Irritation Includes a Fairness Question

While some in Texas politics would like to abolish property taxes, there are constant efforts to overhaul them, like the percolating effort to raise valuations of supposedly undervalued business properties in the state.

It is not a new idea, but there is a new push for higher appraised values on commercial and industrial property. Previous protests along these lines have focused on fairness — on whether homeowners are getting the same deals that commercial owners are getting from local appraisal agencies. The latest such effort, calling itself “Real Values for Texas,” seems aimed more at putting money into schools and other government programs that depend on property tax revenue.

The complainers have friends in high places, like Houston Mayor Annise Parker, who has said the Legislature should change a system that “is obviously inequitable and rewards a lack of transparency by the owners of many commercial properties.”

If those commercial values were “corrected” in the way that the group contends they should be, it would add $4.4 billion in revenue to school districts, counties, special districts and cities in the state’s five biggest counties.

Maybe.

Should that argument prevail, it would probably start another one. If the property tax base balloons with new commercial property value, you might think that would bring in more taxes. It would, but only if the various school boards, county commissions and so on left their property tax rates alone. It is those rates, multiplied by those values, that produce tax revenue.

If the values go up, they could bring in more money by leaving rates unchanged, lower tax rates to keep revenue unchanged or do something in between.

It is not one issue, but two. The first is about whether the property tax is fair, treating residential, commercial and industrial property owners the same way. The second is about how much each government needs and wants to spend, and whether each can extract the money it wants from property owners of all types.

Commercial property owners are more likely to hire lawyers to argue with tax officials about property values. And commercial property owners can sometimes make arguments that the residential property owners cannot. Houses are almost always valued on the basis of sales price. In states where sales prices are kept in public records, it is easier, but even in states like Texas, assigning values to most homes is pretty straightforward. That is especially true in active markets where home sales are healthy.

Commercial and industrial real estate is more complicated. A hotel or an office building, for instance, can be valued on sales prices, if any are available, and if, in a state where those prices are closely held business secrets, they are reliable. A property can be valued on income — some multiple of how much it produces in rent every year. The land might be worth more than whatever is on it, and the value could be based on what it would be worth if developed. You could easily spend four years in college learning all of the ways to put a number on the value of a building.

Or on how to discredit a value someone else assigns to it. That is what the lawyers are for, and it is also why they have pretty good arguments. Their success at arguing for lower property values is also fodder for protests from others. It looks like they are getting a deal when they bring down an appraisal, whether they are or not.

Put valuation in the suggestion box for the next legislative session. It can go in next to the proposal for abolishing property taxes and replacing them with sales or other consumption taxes, an idea sparking debate in the race for comptroller. Lawmakers arrive in Austin every two years with freshly burnished proposals to limit annual increases in property taxes, rates or appraisals. Property taxes are the primary source of revenue for public schools in Texas, and with that financing system under court review, it is reasonable to expect some kind of legislative attention.

Lawmakers might raise more money with property taxes, or lower rates, or change valuations. It is hard to know. But this is clear: Across the political spectrum, the people they listen to — voters — are irritated about property taxes.