Unless you’re abstaining from all forms of Texas mass media, you are probably aware of the controversy over public education and property taxes. Last year, the Texas Supreme Curt ruled that the state’s school-funding system is unconstitutional because it relies on a statewide property tax. The Court gave lawmakers until June 1 to come up with an alternative or Texas schools would be forced to close. To meet the court-imposed deadline, Gov. Perry charged the Texas Tax Reform Commission – a bipartisan panel of 24 business leaders chaired by former state Comptroller John Sharp – with finding a solution to the flawed tax structure. The panel responded with recommendations for a predictable and flexible revenue source that does not target any single industry. Recently, Texas lawmakers passed key provisions of the commission’s tax plan, providing the best hope for meaningful property-tax relief for all Texans.

HB 3, which cleared the House on April 24, would overhaul the state’s business tax closing a loophole that many businesses have used to avoid paying a franchise tax. Experts predict that this low-rate, broad-based business tax will raise nearly $4 billion in revenue for the state. In addition to the business tax, House members passed a cigarette tax increase of $1, and these funds, along with a sizeable portion of the state’s surplus, will give Texans a $6 billion reduction in residential property taxes – the largest private-property tax reduction in the state’s history.

If you live in Texas, then you know that our heavy reliance on property taxes to fund public education has forced homeowners to shoulder the state’s tax burden for far too long. Currently Texas ranks a dismal 42nd among U.S. states in homeownership, and our property taxes are partly to blame. It seems to me that HB 3 helps to rectify this inequity – reducing homeowners’ tax rate for school operations and maintenance by approximately one-third. House lawmakers agreed, as 80 Democrats and Republicans stepped up in support of HB 3. On May 2, the Texas Senate concurred.   

Those opposed? 
But as with any tax reform, there is opposition. Some pundits oppose the plan, claiming that HB 3 does little to reduce the tax burden on property owners. They argue that as home prices rise and tax assessments go up, the savings guaranteed by this plan will be eroded.

Let’s look at the impact of proposed property-tax cuts on homeowners. The median home price in Texas is $138,700. Currently, most taxpayers are at or near the rate cap of $1.50 per $100 of property valuation. At this rate, a homeowner would pay $2080.50 in school property taxes each year. The current proposals call for reducing the school tax rate from $1.50 to $1 per $100 property valuation. This proposal would ease the annual  tax burden on property owners by nearly $700. I don’t know about you, but to me, that’s a sizeable savings. Of course, the savings may not look so attractive if home-price appreciation continues. But consider the alternative. Without a property-tax cut now, how much do you think you’ll be paying in the near future? Three-thousand, $4,000, even $5,000 on a median-priced home?     

Got a better plan?
Last month, local appraisal districts throughout the state began mailing out the 2006 appraisals. In many areas across Texas, the preliminary numbers show a substantial increase in home value. Some high-end homeowners may even see their values double. While HB 3 provides consumers with a considerable tax break, the appraisal creep could wipe out some savings. There is an idea floating around out there today, and I think it’s a bad one. Some are calling for lowering the current 10% appraisal cap on residential properties to 5%.

Reducing the appraisal cap is a terrible idea and would create dramatic inequities in the state’s already flawed system. When it comes to taxes, what do we all want? We want taxes that are low, predictable, and fair. No one group should shoulder the burden for the rest. Lowering the cap would do essentially that. If you live in a home for 20 or 30 years, you would, of course, benefit from the tax cap. But what about a new homeowner, perhaps a first-time homebuyer? Or what if you need to relocate for work, downsize after the kids leave or want a bigger house as your family and/or income grows? You may get a tax bill on a comparable property that is double or triple your neighbor’s. By giving a long-time resident a safety net with a cap, newer property owners are left to subsidize the difference. In other words, they are forced to shoulder the majority of the state’s tax burden, yet get the same benefits from tax-supported government services. Does that seem fair? It may be to the resident who stays put for 30 years, but it can create a barrier to homebuyers trying to break into the housing market. In addition, lowering the appraisal caps makes it difficult for individuals or families to upsize or downsize, as needed. The cost of staying put potentially outweighs the need for more or less space. And over time, lowering the appraisal cap would result in an unstable tax system.

I have read some editorials recently that call for taxing authorities to lower their tax rates. I’m all for it, but when in the world might that happen? And how much control can consumers exercise over taxing entities? While this would be a great idea – if it were feasible – it still doesn’t address the real problem, which the Texas Supreme Court clearly identified. The current system’s heavy reliance on property taxes to fund public education unfairly relies on all property owners to carry the state’s tax burden. Instead of pushing for legislation that tweaks an already bad system, lawmakers should look for alternative, long-term solutions to the problem.

Today, Texas homeowners have cause for celebration. On May 16, the House and Senate both adjourned sine die with a plan that will lower property taxes and reform the school-finance system. The tax-reform package gives property owners an approximately one-third reduction in school property taxes, allowing for a property tax cut of 11% this year and a total of 33% in 2007. This should save Texas homeowners $500 or more a year. The Legislature also approved the low-rate, broad-based business tax, which experts predict will raise nearly $4 billion in revenue for the state. Gov. Rick Perry has signed the new business activity tax into law and is expected to sign HB 1, which allows for immediate property-tax relief and contains sweeping education reform. HB 1 is awaiting certification by state Comptroller Strayhorn. Texas lawmakers’ bi-partisan solutions appear to satisfy the Texas Supreme Court’s June 1 deadline.