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Significant changes coming to Texas’ property tax system

Synopsis

Legislators approved more than 50 property tax-related bills during the last session. Property taxes are at the top of the Texas Apartment Association’s legislative agenda and TAA weighed in on many of these bills to ensure member interests were protected. Learn more about the changes you can expect to see this year.


Key takeaways

  • In addition to setting some new limits on local tax levies and increasing the state’s portion of public school funding, the Legislature approved bills on a range of topics, including appraisal protests and appeals, bond indebtedness, disaster relief and recovery, economic development, exemptions, local government transparency, open-space land appraisal and tax payments.
  • The new laws include welcome changes and some limits to how quickly tax levies can increase—but Texas remains heavily dependent on property taxes, and the tax and fee burden on multifamily, commercial and industrial taxpayers are expected to continue to represent a significant amount of operating expenses for these properties.
  • In early 2020, TAA will offer a deep-dive property tax webinar that answers owners’ questions on these bills and offers other tips to help navigate the appraisal and valuation process. Look for details in upcoming TAA publications and the association’s website.

This year, the Texas Legislature made some of the most important changes to the property tax system in decades. Hundreds of property tax-related bills were introduced during the session and TAA analyzed all of them to determine whether there was a potential impact on the rental housing industry. Legislators eventually passed more than 50 property tax-related bills, and the Texas Apartment Association actively weighed in on many of them to make sure members’ interests were protected.

In early 2020, TAA will offer a deep-dive property tax webinar that answers owners’ questions on these bills and offers practical advice to help navigate the appraisal and valuation process. Look for details in upcoming TAA publications and the association’s website.

Here’s a look at some of the most significant measures passed by the Legislature.

Starting in 2020, most taxing units, including cities and counties,  will need voter approval to increase their property tax levies more than 3.5 percent.  This was one of the key measures approved in SB 2.

Also, under HB 3, the state is significantly increasing school funding, which will help lower school district property taxes. By adding more than $5 billion in state funding toward school property tax relief, school districts were estimated to cut tax rates for all property owners by an average of 8 cents per $100 valuation with additional cuts expected in the 2020-2021 school year. The cuts affect school district maintenance and operations’ tax rate but not the tax rate for paying off bonds and other debt. A school district will have to lower property tax rates each year if the value of its tax base rises more than 2.5 percent, with the state reimbursing the district for that. Property tax levy is the amount billed to property owners in a year and is calculated as the tax rate multiplied by the taxable value of the property.

A number of taxpayer-friendly changes were also made to administrative procedures as well as to the tax rate-setting process. The Legislature approved bills on a range of topics, including appraisal protests and appeals, bond indebtedness, disaster relief and recovery, economic development, exemptions, local government transparency, open-space land appraisal and tax payments.

Property tax burdens remain high in Texas, however, due to the heavy reliance on the tax in the financing of schools, cities, counties and special-purpose units, such as hospital districts and junior colleges.

Also, while the tax increase limitations provided under SB 2 will restrict cities and counties from raising overall revenue from property taxes more than 3.5 percent a year without a vote of the people, there is no such limitation for individual property, such as apartment communities.

If for example, the appraised value of a multifamily property goes up 20 percent, the tax on that property will likely increase well beyond 3.5 percent.

Note finally that the ability of local entities to increase fees has not been curtailed by SB 2 or by the other property tax legislation described above.

In short, while TAA applauds and supports the changes made to the state’s property tax system, the tax and fee burdens on multifamily and other commercial/industrial property owners to fund local governments are expected to continue to have a significant impact on operating expenses.

Major provisions in SB 2  

SB 2 (Texas Property Tax Reform and Transparency Act of 2019) by Bettencourt (R-Houston) is an omnibus bill that makes significant changes to local government tax rate-setting, truth-in-taxation, rollback tax rates, elections to approve tax increases, appraisal review board procedures, and local government notices and websites concerning property taxes. The key elements of the bill are:

  1. reduction in the rollback tax rate (the threshold above which voters must approve tax increases) for cities, counties and special districts from 8 percent to 3.5 percent beginning in 2020 (excluding units with tax rates of 2.5 cents per $100 valuation or less, junior colleges and hospital districts, which remain at 8 percent; and school districts which are addressed in the Education Code); (Note: Taxes levied on new construction and property improvements are excluded from the 3.5 percent limit. Also, the increases may be averaged over three years, so it is possible for affected taxing entities to exceed the 3.5 percent threshold in certain years.)
  2. mandatory elections on the uniform election date in November for tax rate increases that exceed the threshold rates, as well as voter petitions for certain small taxing units;
  3. change in the term “rollback” rate to “voter approval” rate;
  4. change in the term “effective” rate to “no-new-revenue” rate;
  5. creation of real-time tax notices to be delivered in August to each property owner directing the owner to county-wide websites that provide information concerning tax rates, levies and public hearings for all taxing units in the county, beginning in 2020 (See example of website at the end of the following section.)
  6. inclusion of links on the county-wide websites for the public to provide online comments to governing bodies of taxing units about tax rates;
  7. additional requirements for posting of property tax and budget information on taxing unit websites;
  8. changes to appraisal review board procedures and training, including a prohibition against increased values after protest hearings;
  9. setting the business personal property rendition date on April 15 and requiring extensions for property owners regulated by certain governmental entities;
  10. in counties with population of 1 million or more, creation of special appraisal review board panels to hear protests if requested concerning complex properties (commercial, industrial, utility and multifamily) valued at $50 million or more (adjusted annually for inflation);
  11. additional Comptroller duties, including prescribing tax rate calculation forms;
  12. creation of a Property Tax Administration Advisory Board to make recommendations to the Comptroller concerning the effectiveness and efficiency of the property tax system, best practices, and complaint resolution procedures;
  13. prohibition of taxing unit challenges concerning levels of appraisal for categories of property on appraisal rolls; and
  14. changes to binding arbitration.

For a closer look at how SB 2 compares to current property tax law, see this side-by-side comparison from the Texas Taxpayers and Research Association.

More tax information for taxpayers

Importantly, SB 2 will demystify Texans’ property tax bills. Taxpayers will have much better information about their property taxes thanks to a new provision in SB 2. Texans are used to getting an estimate of their October tax bill in early spring. The notices of proposed value from the appraisal districts include a property tax estimate using last year’s tax rates for each jurisdiction. Unfortunately, that estimate is almost always wrong—the values used are preliminary and a final value may come after the property owner has successfully protested to a lower number, and each taxing unit will adopt new rates over the summer that may be very different from the prior year rates. The estimate of tax is therefore now repealed from the spring notice of value, leaving the notice cleaner and more meaningful.

SB 2 requires appraisal districts to craft a “real time” tax estimate online using a property’s final determined value. The estimate will include three tax rates:

  1. the no-new-revenue tax rate (formerly the “effective tax rate,” i.e. the rate which will raise the same amount of property tax revenue as in the previous year, excluding revenue from taxes on new property);
  2. the voter approval tax rate (formerly the “rollback tax rate,” i.e. the rate above which voters could prevent an increase); and
  3. the proposed tax rate the taxing unit intends to adopt. The amount of taxes the proposed tax rate would raise versus the no-new-revenue tax rate is the increase in taxes the property owner will pay if that rate and the corresponding budget it finances is adopted.

Property owners will be able to see, in real-time, how each individual taxing unit’s budget decisions will impact their individual tax bills and by how much. The webpage will give them basic information about each jurisdiction’s tax hearing, should they decide to attend, and will provide a link by which they may submit comments to the governing board about the proposed tax rate. (See example below.)

Example of website information provided by Texas Taxpayers and Research Association.

Other tax legislation

Beyond SB 2, the Legislature made a number of other changes affecting property owners, including owners of multifamily residential properties, including:

Disaster relief
In November, voters approved a new constitutional amendment that provides for a property tax exemption in declared disaster areas for damaged properties in proportion to the extent of the damage.  The joint resolution establishing Proposition 3 is HJR 34 and the accompanying statutory changes are provided by HB 492.

Under the legislation, the levels of exemption, related to the percentage of damage established by FEMA, will be 15 percent, 30 percent, 60 percent and 100 percent, respectively, and will be pro-rated by the number of days remaining in the year that the property was damaged.

Reduced property tax penalty for developing former agricultural land
HB 1743 reduced the property tax penalty for changing the use of agricultural and timber land to three years of taxes that were saved from the five years required under prior law, and lowered the interest rate on the savings to 5 percent from 7 percent.

Avoidance of penalty and interest in litigation over values
In court challenges overvaluations, HB 861 now allows a property owner to pay the amount not in dispute, the previous year’s taxes, or the amount billed. If the property owner ends up owing an additional amount of tax, it can be paid without penalty and interest if paid before the delinquency date.

Protection against unreasonable value increases
Beginning in 2020, the hurdle that a Central Appraisal District (CAD) must clear before it can raise the value on a property that was the subject of a successful appeal in the previous year is increased. Under the new standard established by HB 1313, the CAD may not increase the value of the property unless “reasonably supported by clear and convincing evidence when all of the reliable and probative evidence in the record is considered as a whole” (emphasis added).

Under prior law, the requirement standard was “substantial” evidence, which only needed to be greater than a 50 percent likelihood of being true. Under the “clear and convincing” standard, the evidence must be substantially greater than a 50 percent likelihood of being true for the CAD to increase your value.

HB 1313 also prohibits a CAD or appraisal review board (ARB) from imposing a fee for filing a protest with the ARB.

Removing biased appraisal review board members from office
For appraisal review boards (ARBs), HB 2179 broadened the grounds for removal of a member to “evidence of repeated bias or misconduct,” whereas prior law required “clear and convincing evidence of repeated bias or misconduct.”

Property tax abatements
The authority of cities and counties under Chapter 312 of the tax code to provide property tax abatements, typically for economic development projects, was extended by HB 3143 through 2029.

Choice of medium for notice of protest hearing
HB 1060 requires an ARB to deliver the protest hearing notice by certified mail or by electronic mail, if the property owner requests that medium in the notice of protest. Under the new law, the ARB is allowed to require the owner to pay the cost of certified mail.

Extended deadline for arbitration
The authority of a property owner to request binding arbitration for resolving a valuation protest was increased to 60 days from the previous 45 days by HB 1802.  The bill also removed the requirement that a CAD certify a request for arbitration and now prohibits the Comptroller from rejecting an arbitration application under certain circumstances.

Top-lining
Under SB 2531, a chief appraiser and a property owner may file a joint motion with an ARB requesting the issuance of an agreed order. This is known as top-lining. The chief appraiser and the owner may provide in the motion that the order may still be appealed to district court.

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TAA remains dedicated to the improvement of the system so that multifamily housing can remain an affordable choice for Texans and so that a fair process is available to all property owners.

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James LeBas consults and lobbies on TAA’s behalf on tax issues. He is a former chief revenue estimator for the Texas Comptroller of Public Accounts. Additional information for this article provided by the Texas Taxpayers and Research Association (TTARA). TAA is a member of TTARA.

Myths vs Facts Regarding Property Tax Reform


Myth

SB 2 caps how much appraisals can increase on my property.

Fact
SB 2 does not cap valuation increases. While Texas law provides a 10 percent annual cap on homestead valuation for the purpose of taxable value, there is no such cap on other property, including commercial, multifamily and industrial.

 

Myth
Cities and other local governments can get around the law by lowering the tax rate on single-family homes and raising taxes on other types of properties.

Fact
Texas does not allow taxing entities to have a ‘split roll.’ The tax rate is the same on all properties within the taxing entities’ jurisdictions.

 

Myth
Cities and Counties set valuations. They can artificially lower valuations on single-family property and raise it on commercial and other types of property to give homeowners a break.

Fact
Central Appraisal Districts (CADs) set the property’s value based on ‘highest and best use’ based on recognized methodologies, such as income or market value. The property owner or the CAD may appeal the valuation to the Appraisal Review Board (ARB) and its ruling may then be appealed through several avenues, including filing a lawsuit in district court or a hearing before a State Office of Administrative Hearings administrative law judge.

During the budget process, taxing entities set their tax rate based on the taxable values of properties in their jurisdiction. While some jurisdictions may rely almost entirely on property tax revenue, others may also receive funding through the sales tax, fees and other sources. Taxing entities do have the ability to provide homestead exemptions for owner-occupied homes. Those exemptions are not available to rental properties or other types of property.

 

Myth
SB 2 prevents all cities and other local governments from raising taxes more than 3.5 percent.

Fact
SB 2 limits how much property tax revenue can be increased by many local taxing entities without voter approval. Under prior law, voters could petition to have an election to ratify property tax taxing entities (cities, counties, community colleges, etc.) if a taxing entity raised revenue from property taxes more than 8 percent (excluding new construction and improvements.) Under SB 2, taxing entities must generally receive voter approval if tax revenue from property taxes (excluding revenue from new construction and improvements) exceeds 3.5 percent. Smaller taxing entities, community colleges and hospital districts are excluded from the 3.5 percent threshold and school districts are treated differently under restrictions in the Education Code.

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