Welcome fellow ELGLerites to the second installment in a one-hundred-and-three part series, Better Know A Budget. On today’s agenda, we will be discussing the two parts of a tax rate, its impact on the property tax, and the current controversial debate on appraisal and revenue caps for cities in Texas.
So put on your budget caps, pop in your Wilson Phillips CD with “Hold On” set to repeat, and get ready for some heavy municipal budget jargon.
Part Deux: Getting to Know (and Love) Your Budget
By Matt Monedoro – LinkedIn and Twitter
Property Tax Rate
In Texas and in other (but not all) states, municipal budgets are composed of two equally important halves: the Operating Budget and the Capital Budget. Each of these is primarily funded by the two parts of a local government’s tax rate: the Operations and Maintenance (O&M) rate and the Debt Service rate. The Operating Budget is funded by the O&M rate and is the primary means by which most of the financing, acquisition, spending, and service delivery activities of a city are controlled on a day-to-day basis. The Capital Budget is maintained through the Debt Service rate and is funded through debt. Since most cities do not maintain huge sums of cash to finance large capital projects, debt is issued in the form of bonds. Bonds are debt instruments much like a house mortgage, generally issued for a period of 20 years. The local government uses this debt to fund major infrastructure projects, which we will discuss in a future article.
Property Tax
So how does the tax rate impact the property tax? Let’s use the City of Plano as an example. Plano’s tax rate is 34.38 cents for the Operating Budget and 14.48 cents for the Capital Budget. Combined, this comes out to a tax rate of 48.86 cents. In Texas, the tax rate is based on a per $100 assessed valuation of residential property. So we will take that 48.86 cents and apply it to the $100 dollars of assessed valuation. Assuming I live in a rundown shack that is assessed at $100 by the Central Appraisal District of Collin County, my property tax for the City of Plano would be $0.4886 cents. (I’d probably just give them $0.49 if I was in a good mood). However, this is NOT the entire property tax. There are also other local entities that levy a tax on residential property. In Texas, common benefactors from the property tax include the city, the county, community colleges, and local school districts. School districts collect the largest portion (typically 50 percent or more) of the property tax. Take a look at the 2014 property tax breakdown below for the City of Plano.
So, in addition to my $0.4886 being paid to the City for my appraised $100 shanty, I also need to pay the community college $0.0819, Collin County $0.2350, and PISD $1.4480, resulting in a total property tax bill of $2.2535, or $2.26 per $100 assessed valuation. Considering the median assessed value of a home in Plano is $330,000; I’m glad I opted for the energy-efficient shed.
Argument For Appraisal and Revenue Caps
Now let’s review what we just learned. Property tax bills are built on two factors: the tax rate and the value of the property being taxed. Given the assumption that property values regularly increase in well-to-do areas, tax revenues go up even if the tax rate stays the same. Proponents of the caps argue that this allows cities to collect more revenue through property taxes while elected officials get to boast that they didn’t raise the tax rate. In theory, the appraisal and revenue caps would provide tax relief to home owners.
Argument Against Appraisal and Revenue Caps
Cities and counties argue that they need the added property tax revenue to accommodate continued growth and inflation. Under current law, cities and counties can’t collect more than an additional 8 percent in property taxes on pre-existing properties without opening themselves to the possibility of an election to lower the tax rate — to roll it back to the previous year’s rate (thus 8% is the “rollback” rate). Justifiably, many municipalities strongly oppose any legislation that would erode their authority in future years. Furthermore, they disapprove of enacting unfunded state mandates that would negatively affect their budgets by significantly limiting the local government’s ability to raise revenue. The Texas Municipal League (TML) is a great resource for more information about the Appraisal and Revenue caps, as is fellow ELGLerite, Ryan Adams.
It’s Mr. Bill!
Two bills have been filed in the Texas Senate regarding the caps. Senate Bill 182 would cap annual increases in tax appraisals for homes at 5 percent a year (currently, tax appraisals cannot increase by more than 10 percent in a year). Senate Bill 156 would reduce the rollback rate to 4 percent and require any city or county that exceeds that threshold to automatically hold an election (currently, citizens must petition to put rollback elections on the ballot). The Texas Legislature is apparently using the Urban Dictionary definition for taxation (google at your discretion).
Stop by next month when we will discuss the features of an operational budget, the harsh reality of maintaining current service levels while battling inflation, and the meaning to the ending of the film Birdman (seriously, did anyone get that?)