On April 17, 2006, the cheers from the crowd at the Capitol in Austin were deafening. Thousands of Texas REALTORS® and homeowners from across the state converged on the south lawn in support of the recommendations by the Texas Tax Reform Commission to improve the state’s current tax structure. In the first salvo of the special legislative session, REALTORS® and homeowners came together in an all-out effort to sway lawmakers to enact the commission’s plan. The Texas Legislature was on the brink of passing the largest property-tax reduction in the state’s history.

Meeting the requirements set forth by the Texas Supreme Court, Texas lawmakers successfully passed a comprehensive plan that lowers property taxes and reforms our school-finance system. Texas REALTORS® stood firmly behind this plan, which gives homeowners a property-tax reduction in excess of $15.7 billion by 2010. To break that down, this one-third reduction of the maintenance-and-operations portion of school property taxes should save Texas homeowners on average $500 or more each year. And as we all know, Texas has some of the highest property taxes in the nation, which significantly affects residents’ ability to own a home of their own. Currently, Texas ranks only 42nd among U.S. states in homeownership. This historic tax reduction not only benefits all property owners, but also makes homeownership more affordable. That’s definitely something to cheer about, right? Well, we’re not quite ready to celebrate just yet.

Just as the news of lower property taxes swept the state, so did skyrocketing property appraisals. This is an ongoing problem for many homeowners throughout Texas with appraised values rising 5%, 7%, even 10% every year, threatening the ability to buy or even keep one’s home. In Texas, it’s typical that property appraisals outpace a homeowner’s wage increases, leaving little money for discretionary spending and having a significant impact on the state’s overall economy. But this so-called “silent tax hike” has property owners outraged and threatens to wipe out any savings from lower property taxes.

Before we talk about what we can do to address the problem, let’s take a second to think about how it might be worse. If property taxes had not been reduced by 33%, Texans would still be paying the highest property taxes in the nation, coupled with rapidly rising property valuations. Can you imagine how much that would cost today? Or what that figure might look like in 10 years? The work of the governor, the tax commission, and the Texas Legislature in reducing the tax burden was an excellent first step, but it was just that – a step. Unless we look for alternatives to the current appraisal process, homeowners will see little tax relief from the recent reform.      

Gov. Perry is taking action and addressing homeowners’ concerns about rising property valuations. He recently announced the creation of a 15-citizen task force to examine the state’s current system and make recommendations for improving it. Modernizing the tax structure is vital to the future of our state, as real estate has been driving the Texas economy for more than five years. This task force is faced with a difficult job, and the outcome could have long-term benefits for all Texans.

From appraisal caps to the local adoption of the effective tax rate, there are several ideas floating around out there for fixing the flawed appraisal system. I should tell you that although there’s been some talk, nothing has been brought up yet in the Texas Legislature or by the task force. But I want to briefly discuss the two I mentioned. Because as a homeowner or potential homeowner in Texas, it’s important that you understand how the various alternatives might affect you.

Appraisal caps are something we hear about quite frequently. Some consumers think that lowering the cap will help ease rising property valuations. But appraisal caps can wreak havoc on the economy. The current cap on appraisals is 10%. This means that each year, your property’s taxable value can rise only 10% over the previous year. While lowering that cap, to say, 5% may seem like a good solution, it will be short-lived and will eventually create serious inequities in the tax system, negatively affecting the Texas economy. Appraisal caps typically shield the wealthy few. The higher your property’s value, the bigger the tax benefit. This leaves the bulk of the tax burden on a large group of fellow Texans – average residential property owners. The wealthier, whose homes may increase in value by double digits, receive more tax protection from the 10% cap. Lowering that cap would only serve to benefit this group even more.

Appraisal caps also work to freeze people in their homes. Let’s say you are planning to move into a new house, and your soon-to-be neighbor has lived in the home next door for 25 years. That neighbor would be paying significantly less in property taxes than you will be. Valuations have gone up dramatically in 25 years. Your bill is based on the current value, while your neighbor’s is based on the original value, with annual capped increases. Who will be shouldering the tax burden on that block?

One other idea I’d like to mention is lowering the effective tax rate. It’s a bit confusing, but will likely grow legs during the 2007 legislative session. In a nutshell, the effective tax rate is the rate that provides the local taxing unit with approximately the same amount of revenue that it had the previous year. So if property values go up, the effective tax rate goes down.

The recommendations by the appraisal reform task force could have enormous implications for property owners and the future of the Texas economy, so let your voice be heard. Over the next several months, the commission will hold public hearings across the state. I strongly encourage you to participate. Learn more about the issues and have some say in how you are taxed. If you fail to get involved, you really have no reason to complain. While revamping the current tax structure will take time, Gov. Perry’s blue-ribbon panel is a step in the right direction.