Senate Bill 2, a property tax reform bill passed by the state Legislature in May, has local city officials concerned about the effect the legislation will have on their operations.
The Texas Property Tax Reform and Transparency Act, signed into law June 12, requires cities, counties and other districts to hold an election if they wish to levy a 3.5% increase in property taxes from the preceding year. Previously, the threshold, called the rollback rate, was 8%, at which residents had the ability to petition for an election to be held. The growth rate calculation does not include new construction value and can be averaged over three years, so taxing entities can occasionally exceed 3.5% as long as it averages out. Cities with less than 30,000 population are not subject to the automatic election, but residents can petition for a vote.
For built-out cities such as Bellaire, which are primarily residential and whose general fund revenue consists of over 60% in property taxes, the effects of the bill could prove harmful to their ability to operate effectively.
“Our city has been fortunate, like other cities, in that it’s been able to adopt property tax rates up to the cap,” Bellaire Chief Financial Officer Terrence Beaman said. “As a result of that, you’re able to provide all these demanding city services and things of that nature. So when you’re put in a situation where you lose the ability to do that, you should automatically be concerned.”
Beaman said the former cap placed at 8% could translate to about $1 million in new revenue per year for a city like Bellaire, but with the cap at 3.5% the potential increase would be reduced to about $400,000. As a result of the expected loss in revenue, Beaman said the city will have to look for ways to diversify their income.
“So that’s the maximum growth for our major revenue source,” Beaman said. “It’s a challenge, especially for our city, and it’ll be a challenge for other cities that are heavily dependent on property taxes.”
West University Place City Manager Dave Beach also expressed concern about the changes to his city’s property tax revenue, which makes up the majority of the city’s general and debt service funds, and said the reduced revenue could affect city services and staff down the line as well as prevent cities from engaging in ongoing maintenance.
“I think [the revenue caps]are a good idea in theory, but we’re a fiscally prudent city,” Beach said. “What you’ll probably start seeing cities do now is pay-as-you-go maintenance, and as cities become more fiscally constrained they’ll start pushing off pay-as-you-go [projects]into debt service. … If you have to pay just to keep the lights on, are you paying for new projects?”
Beach said he expects more and more cities to be adversely affected by the state legislation in the following years despite their own local efforts to set a reasonable tax rate that works for their community.
“The residents of West U should have control in how their elected representatives choose to run the city, but now you have a state agency coming in and saying, ‘You can only charge this much because your taxes are too high,’” Beach said. “Why don’t they let the residents of West U make that decision? Home-ruled cities passed a charter for a reason—because they want to exercise control over their own destiny.”