The American Legislative Exchange Council’s most recent edition of “Rich States, Poor States,” which ranks U.S. states based on economic competitiveness, showed property tax burden is one of the few areas where Oklahoma holds a decided advantage over Texas.
Legislative sessions have now concluded in both states. In Oklahoma, lawmakers handed out raises to government employees and boosted spending across the board, but advanced few major policies designed to make the state more attractive to business. Meanwhile in Texas, lawmakers passed reforms supporters say will slightly reduce property taxes, rein in future growth of those tax payments, and increase citizen input into taxation.
Officials in Texas believe those reforms will help increase Texas’ competitive edge.
“We don’t have an income tax, but we’re paying a lot in property taxes,” said Mack Morris, deputy state director for Americans For Prosperity-Texas. “But this gives us a little more certainty.”
“Rich States, Poor States” showed that property tax payments in Texas were more than double the amount paid by Oklahomans in 2018. That year, Oklahomans paid $16.26 in property tax per $1,000 in income, ranking second-lowest in the nation. In Texas, payments stood at $38.35 per $1,000 in income, ranking 41st, meaning Texas ranked among the 10 highest-tax states for property tax.
Property tax was the primary area where Oklahoma had a strong advantage over Texas. In contrast, Texas ranked far better on income taxes, ranking 1st in the country, and workers’ compensation costs, where Texas ranked ninth best compared to Oklahoma’s ranking of 27th. The sales tax burden in the two states was almost identical.
Thanks in part to its lack of an income tax and light regulation, Texas has boomed for years. But officials say the state’s property taxes had become a damper on growth.
“It is a challenge for Texas,” said Debbie Cartwright, counsel for the Texas Taxpayers and Research Association. “Probably in the last 10 years residential property has increased in value significantly in urban and suburban areas because of market demand. So there’s been a great deal of concern among homeowners that their property taxes have gotten to be excessive. And as you know, the cost of housing is a significant issue when people determine whether they want to live in a state. And for businesses, they have found that their property taxes have gone up to such an extent that, in the case of some small businesses, they’ve closed their doors.”
“We have our own affordability challenges here in Texas,” said Daniel Gonzalez, legislative director for Texas Realtors. “People, when they buy their home, they’re buying on a set budget. They can afford the house in year one or year two, but as the years go by, as that property tax liability continues to increase, their income may not be keeping the pace or keeping up with the property taxes.”
In some cases, he said people reach a point they are “forced to sell.”
Texas’ high property taxes are driven in part by heavy dependence on local property taxes for school funding. One way this year’s reforms addressed that was by partially shifting school funding away from local sources to state tax sources. The money for increased state payments comes primarily from increased collections in the general revenue fund, particularly from sales taxes.
“What they’ll do is use the sales-tax surplus to buy down the property tax in the future,” said Talmadge Heflin, director of the Center for Fiscal Policy at the Texas Public Policy Foundation. “And I think if they will stay with that program, I think we’ll see the economic advantage maybe expand a little bit.”
“There was a shift, by a number of percentage points, back to the state from local property tax,” Cartwright said. “The Legislature put in over $11 billion into the school-finance system for the biennium, which is significant. And it’s for both property tax relief and educational programs. It’s one of the most important school-finance changes in the last number of years.”
Over time that change is expected to result in lower property tax payments than what would have otherwise occurred.
“That will take a lot of pressure off of property taxes locally because of the restraint on school taxes, which compose over half of the property tax burden in the state,” Cartwright said.
Also under this year’s reforms, school districts will no longer be able to increase spending above 2.5 percent without voter approval. For cities and counties, spending can increase no more than 3.5 percent without a vote of the people.
Over the long term, supporters believe that change could restrain property taxes or lead to better use of existing taxpayer funds.
“That’s in place to try to keep the growth rate down,” Heflin said. “That percent is currently 8 percent. And if they go over the 8 percent, the citizens have to get out and get a petition signed to give them the right to hold an election. This way it’s more of an automatic election if they want to spend more than that 2.5 percent per school district or 3.5 percent for cities and counties and special districts.”
While it is expected voters will readily support spending when there’s a clear need demonstrated at the local level, supporters believe the election provision will reduce wasteful spending because of increased transparency.
“The hope is that there will be more attention to property tax by local governments to keep the levies at a more controlled amount,” Cartwright said.
Gonzales said the reforms “essentially takes autopilot off and requires local entities to not just benefit from higher property values but actually have to go and make their case to voters, to taxpayers, why their budgets are going up.”
The old 8-percent threshold was set in the late 1970s when inflation was very high. Its existence led to a dramatic compounding effect over time. Property value appraisals were constantly increased and critics say local school and county government spending was growing almost automatically even as population growth simultaneously fueled stronger demand for existing homes and property.
“They saw appraisals skyrocket,” Morris said. “That’s what was happening. The tax rates, yes, some of them went up, but the appraisals skyrocketed and caused that aggregate, effective tax rate to just go boom. And that was holding people back. That was taking away certainty. People were being taxed out of their homes or not being able to afford their businesses any longer because they couldn’t keep up with the taxes.”
In Dallas, Morris said the average property tax payment surged roughly 50 percent in just five years, “which is absolutely insane.”
Texas lawmakers also provided state funds to reduce “recapture” of local property taxes, a system in which school districts with high property valuations pay a share of their property taxes either to the state or directly to another district with lower property values. In some districts, Heflin said the recapture requirement forced schools to offload hundreds of millions in local property tax funding to other schools. That in turn fueled demand for higher property tax valuations or tax rates in those property-rich districts.
“Rich States, Poor States” shows that even with higher property taxes, Texas has remained attractive to new residents at a time Oklahoma has struggled. Absolute domestic migration to Texas continued to grow in 2016 and 2017, while the report showed Oklahoma experienced losses in those years.
The two states have been separated by more than migration patterns in recent years. “Rich States, Poor States” also ranked Texas 18th best in the country for “recently legislated tax changes” per $1,000 of personal income in 2017 and 2018. A very slight reduction in Texas taxation occurred during that time, according to the ALEC report. In Oklahoma, due to numerous tax increases, the report showed the state ranked 46th in the country for legislated tax changes, only a few spots removed from last place.
Over time, supporters believe the cumulative effect of this year’s property tax changes will make Texas even more attractive to new businesses and residents.
“The school-finance measures kick in this tax year, so people will see their school taxes reduced for 2019, but the other reforms for other taxing jurisdictions really don’t go into effect until 2020,” Cartwright said. “And so it’s going to be a longer-term process.