By Dr. Barry Poulson, Adjunct Scholar, Americans for Prosperity

Introduction

We are witnessing a property tax revolt not unlike that experienced in the 1970s. Homeowners in many states have found their property taxes increasing at double digit rates. Rising property taxes reflect both increasing property values and increasing property tax rates, the latter coming from increased assessments rates and higher property tax rates.

Some states have responded to this property tax revolt with a variety of legislative measures to provide property tax relief. Florida, Indiana, Idaho, New Jersey, New York, Pennsylvania, Rhode Island, South Carolina, and Texas have all introduced property tax relief legislation.

The property tax revolt has also set the stage for new tax and expenditure limits (TELs) at both the state and local level. Historically there has been a close relationship between property tax revolts and efforts to impose TELs. Indeed it is fair to say that the most successful property tax relief has been the result of effective TELs introduced at both the state and local level. Efforts to provide property tax relief through legislative measures have too often proven to be short lived and ineffective. This study reviews the important linkage between the property tax revolt and TELs in several states.      

The Historical Background

Prop 13 was the first TEL to effectively constrain the growth of property tax revenues in California in 1978.  The state TEL—the GANN Amendment—was enacted in the following year. The property tax revolt quickly spread to other states. Massachusetts, for example, passed a local TEL, Prop 2-1/2, drawing upon the local government section of the California model. Since Prop 13 was enacted twenty nine states have introduced some form of TEL.

TELs originating through the initiative process are ordinarily designed by taxpayer organizations, and therefore tend to be more stringent than those enacted through the legislative process. This is certainly true of the TELs that have already been enacted through initiatives, such as Colorado’s Taxpayer Bill of Rights (TABOR) Amendment, California’s (GANN) Amendment, Washington’s (I601) Amendment, and Missouri’s (Hancock) Amendment.  In each case, however, these stringent limits have been weakened over time. When these states experienced a revenue shortfall, the response was to weaken their stringent limit.

The most effective TEL enacted in the states thus far is Colorado’s Taxpayer Bill of Rights or TABOR Amendment. TABOR was designed by a taxpayer organization and introduced through the initiative process, first at the local level in Colorado Springs in 1991, and then at the state level in 1992. 

As in California, TABOR was a response to the property tax revolt in Colorado. There is little question that TABOR has enabled Colorado citizens to get property tax relief in the long run. Colorado Springs, for example has reduced the mill level ( is this “mill level” or should it be “mill  levy”?  since we don’t use that term in Texas, can we change that to “property tax rate’ – would that be accurate??)  eight times due to TABOR. Similar reductions in local property taxes have resulted from TABOR across the state.  

TABOR has also resulted in property tax relief at the state level as well. When state revenue exceeded the TABOR limit in the late 1990’s, Colorado tax payers received $3.25 billion in tax rebates. The state also cut a number of taxes, including income, sales, and property taxes. When revenue exceeds the TABOR limit the surplus revenue is offset in part by property tax relief for homeowners, and reduced business personal property taxes.

Because TABOR has effectively constrained the growth of government, Colorado has been able to avoid the fiscal problems encountered in other states that lack an effective TEL. As a result, when Colorado experienced a revenue shortfall during the recent recession, the state was able to balance the budget with modest cuts in some state programs. However, Colorado does not have a budget stabilization fund, so it was not in a position to offset much of the revenue shortfall.

Colorado has experienced one of the highest rates of economic growth in the country. However, Colorado also experienced a sharp recession accompanied by a revenue shortfall. This past year the Colorado economy recovered and is again growing more rapidly than other states. As the economy recovered, revenues again exceeded the TABOR limit, requiring tax rebates. 

Last year the Colorado legislature introduced two ballot measures, Referendums C and D. Referendum C, permitting the state to spend surplus revenue for the next five years, passed. Referendum D, permitting the state to issue new debt, did not pass.  Many ballot measures have been presented to Colorado voters since TABOR was enacted.  These ballot measures tend to pass at a high rate at the local level, but most ballot measures to raise taxes or spend surplus revenue at the state level have been rejected by Colorado voters.

Critics argue that Colorado has abandoned the TABOR Amendment. That is nonsense; TABOR provides that state and local governments can spend surplus revenue and issue new debt, but first they must secure voter approval. Referendum C did weaken the TABOR limit by modifying the revenue base used to calculate the limit. This pattern of weakening TELs in periods of recession and revenue shortfall is observed in many states with effective TELs.

The New Battleground: Texas

In recent years many states have experienced a property tax revolt, not unlike that experienced in the 1970s. Many local jurisdictions across the country have experienced double-digit growth in property tax revenues.  This reflects both increased appraisal values and increased property tax rates. City and county governments have responded to the windfall of increased property tax revenues with double-digit growth in spending. Existing constraints on property taxes have often proven ineffective in limiting the increased property tax burden. As a result citizens in some local jurisdictions have introduced local TEL legislation, and some of these initiatives are based on the organization of state legislators, American Legislative Exchange Council (ALEC) model.

Ground zero in this property tax revolt is Texas.  For many years Texas citizens have tried unsuccessfully to constrain the growth of government. Texas was one of the first states to enact a state tax and spending limit, in 1978. That tax and spending limit has rarely constrained the growth of state revenue and spending, due to flaws in the design of the limit.

The Texas constitutional property tax appraisal cap enacted in 1997 applies only to residential property and is set at 10 percent.  That limit has been ineffective in constraining the growth of property taxes.  Even with that limit, residential homestead property taxes can double in only 7 years, and property taxes grew 84% from 1996 to 2004.   This increase in property tax burdens is at the center of the debate over tax reform in Texas. Since 1980 local property tax revenues increased six fold, from $3.9 billion to $24.5 billion. According to the Tax Foundation, Texas ranks as the 13^th highest in the nation in property taxes relative to personal income. While Texas is generally regarded as a low tax state and has no state income tax, property owners bear a disproportionate share of the tax burden.

It is important to understand why the Texas property tax limits have failed to constrain the increase in property taxes.  Texas imposes a very generous property tax appraisal cap of 10 percent. Several measures have been introduced in the legislature to lower that appraisal cap. Texas also provides for a revenue rollback only after property values are reassessed. Each local jurisdiction then calculates a rollback tax rate.  That tax rate must provide the same amount of revenue as in the prior year, plus an 8 percent “buffer”. The rollback tax rate must also provide sufficient funds to pay current debt. If property tax revenues come in above the limit, citizens can petition for an election to rollback the increase to 8 percent.

There are several reasons why this rollback limit has failed to constrain the growth of property taxes:

1.   The limit provides a generous 8 percent “buffer.” In recent legislative sessions, legislation has been introduced to lower that rollback rate.

2.   The limit is not triggered automatically. Citizens must first petition to put a referendum on the ballot, and then secure a majority vote to enforce the revenue rollback..

3.   The limit lacks transparency and accountability. Legislation has also been introduced to try to increase transparency, and to make it easier for citizens to petition for a rollback election.

It remains to be seen how successful the latest called legislative session will have been in  lowering school property taxes. The Texas legislature has been largely unsuccessful in using state funds to provide local property tax relief in the past. The fatal flaw is the fungible nature of state and local funds, and the taxes used to generate those funds.  When local jurisdictions receive state funds to provide property tax relief, they often use those funds to sustain higher levels of spending. In the long run appraisals and property tax rates are often increased, resulting in higher, rather than lower, property tax burdens. All one has to do is look at the annual double-digit increases in property tax revenues in many local jurisdictions over the past decade.  The latest legislative action has attempted to keep the school taxes lower, and only time will tell if taxpayers end up being able to take that tax cut to the bank. 

Texas must avoid the fatal flaws that have undermined past efforts at property tax relief.

The fatal flaw in past efforts to use state funds to provide property tax relief is the absence of constraints on the ability of local jurisdictions to offset that relief with increased appraisals and property tax rates. The solution is to impose an effective tax and spending limit on both state and local government.  TELs, based on the ALEC model, have been introduced at both the state and local level in Texas.

Houston recently enacted this TEL, Prop Two, in its city charter. The Houston TABOR links a stringent tax and spending limit to an emergency and rainy day fund. This limit will both constrain the growth of spending, and stabilize the budget over the business cycle.

Passage of Prop Two in Houston followed a familiar pattern. When Prop Two was placed on the ballot through an initiative, the Houston City Council responded with its own watered down TEL, Prop One.  The latter was clearly designed to preempt the more stringent Prop Two initiative drafted by a local taxpayer group. When both ballot measures passed, the mayor of Houston interpreted the result to mean that the weaker TEL was the binding constraint.

The taxpayer group then successfully challenged that interpretation in the courts, so that the more stringent Prop Two is now in the city charter. The Houston City Council continues to attempt to undermine the limit imposed by Prop Two.

Several taxpayer organizations in Texas have worked together and designed a model TEL based upon Houston’s Prop Two, and are gathering signatures in several cities to impose this effective TEL at the local level. The expectation is that successful passage of these local TELs will provide the impetus for passage of an effective state TEL in Texas, as has occurred in other states.

Americans for Prosperity and AFP Foundation
807 Brazos St, #210, Austin, TX   78701-9996
phone: 512/476-5905; fax: 512/476-5906
email: pvenable@afptx.org; website: www.americansforprosperity.org