Amid renewed calls for overhauling education financing, state leaders and lawmakers have announced a property tax reform package that includes a 2.5 percent rollback revenue cap for cities, counties and school districts.
“The Republican leadership has gotten together and pledged to do two things: address property tax reform and bring some tax relief,” said Sen. Paul Bettencourt, R-Houston, who is leading a Senate committee on property taxes and was the lead author for Senate Bill 2, proposing the cap and other tax reforms. An identical bill was filed under House Bill 2.
City and county leaders are on the defensive, saying it would take away a tool for council members and commissioners to manage local priorities effectively. The cap would apply to the revenue generated for maintenance and operations; it would not affect debt rates, which are set by bond elections.
“The best government is local government. The state shouldn’t impede on them being able to provide what they need to provide,” Brazoria County Judge Matt Sebesta said.
For taxpayers in prosperous cities such as Pearland, one of the fastest growing in the country, property values are a double-edged sword—it means better resale value but higher taxes every year.
“A cap would be fantastic,” said Barry Gordon, a Pearland resident in the Woodcreek neighborhood since 1997. “Anything would be better than what we have in place now.”
Gordon’s property has grown in value by 44 percent since 2013, based on county records, even though he has made no improvements.
How a cap would work
Under existing law, when a jurisdiction proposes increasing its M&O tax rate by more than 8 percent above the effective rate, residents can petition for a rollback election, which, if approved by voters, “rolls back” the tax to the 8 percent level. The effective M&O rate is calculated to generate the same amount of revenue as the year prior, not including new property added to the rolls.
Unlike the 8 percent threshold, the proposed 2.5 percent cap would trigger an automatic election rather than an election-by-petition process.
“These caps are really arbitrary. It doesn’t take into account fast-growth cities and what they need,” Pearland City Manager Clay Pearson said. “It’s mindless.”
Rep. Ed Thompson, R-Pearland, said as a former city council and school board member, these democratically elected bodies are there to ensure taxes balance city needs and residents’ ability to pay.
“I keep telling my fellow members, these schools and council members, they have to stand for election too—if they’re raising taxes an inordinate amount, the people can vote them out,” Thompson said. “We can talk about capping all we want, but to be brutally honest, education, schools, that’s where the majority of your taxes are paid. That’s where we can make a real difference.”
The benefit of a cap, according to proponents, is to limit future tax increases. If a city wanted to raise revenue beyond 2.5 percent, for example, to provide cost-of-living pay increases to city staff, firefighters and police, it would need broad voter buy-in, much like a bond referendum.
“You add a lot of cost into the thing, you have to have a city election, and then the thing becomes, how many people actually vote in that election … does it then get skewed by those who oppose it?” Thompson said.
Pearland City Council Member Tony Carbone, the lone vote against a M&O tax hike in 2016, said the city should be able to justify tax increases to voters.
“Everyone knows the rules are fixing to change; we’ll just have to learn how to play by them,” Carbone said. “So we’ve got to have an election and defend our position. … We’ve got to do a good job to get the votes to support it.”
If the 2.5 percent rollback rate had already been the law of the land, Pearland would have had to seek voter approval four of the past five years.
Tax bill effects
A property owner’s tax bill is based on three factors: the appraised value of the property, the taxing jurisdictions they reside in, and the tax rates of those jurisdictions. Two residents in the same city, residing in different school districts or other jurisdictions, can see different tax bills for similarly valued property.
“A lot of folks get upset when they write their check out to Brazoria County. They don’t realize, only 12-16 percent of that bill goes to the county. Maybe another 15-20 percent goes to the city … and 50 percent goes to the school district,” Sebesta said.
The second-biggest chunk often goes to a municipal utility district, if the resident lives in one, he said.
The city of Pearland’s tax rate has hovered between about $0.68 and $0.70 per $100 in valuation since 2013, but appraisal values have been rising as the city adds development.
From 2013 to 2017, the taxable value of Pearland property increased over 56 percent, but its total tax revenue has increased about 48 percent, according to records provided by the city and the state comptroller’s office.
“We may not see the tax growth for one or two years after a new neighborhood goes in, but we have to provide service on Day 1,” Pearson said.
Based on estimates provided by the city of Pearland, a rollback rate of 2.5 percent would have reduced potential revenue by over $1 million, equating to a potential savings of about $33 for each of the city’s 30,000 households, a U.S. census figure.
“A cap would save each resident a few bucks a month, but for the city, that’s millions less for police, streets and services,” Pearson said. “We’d have to cut other areas to protect public safety.”
In 2019, Pearland used the effective rate, which resulted in a rate hike even though it meant flat revenue growth, so a cap would have not affected its budget this year. However, for the past five years on average, Pearland has raised its M&O rate over the effective rate by more than 7 percent each year.
Bettencourt rejects the argument that the savings will be small.
“This will apply to everybody—cities, schools—across the board,” Bettencourt said. “That’s how you will see the savings. And when you slow the growth of the bills, you’ll see long-term tax relief.”
Pearland is collecting significantly more revenue, but the burden on taxpayers has been spread out. Median household incomes rose 11 percent between 2013 and 2017, while median real estate taxes rose 8 percent, according to American Community Survey data collected by the U.S. Census Bureau. The share of taxes as a portion of income has been flat, the data shows.
Lawmakers and local officials agree school finance reform will provide tax relief, and more transparency is needed around tax-collecting agencies.
In addition to tax caps, HB 2 and SB 2 offer some measures toward transparency, including renaming the “effective tax rate” to be the “no-new-revenue rate” and requiring detailed tax bill examples for proposed rate increases.
“Anything that enhances transparency—I’m absolutely in favor of that,” Sebesta said.
For residents such as Kurt Evenson, who pays $12,000 in taxes on a home worth $369,000, what hurts most is not the city’s rate, but his local MUD, about a fourth of the total bill.
“All I get is bill once a year,” he said. “MUDs aren’t subjected to the same level of scrutiny as what the city is.”
SB 239, filed in this session, would take one step toward addressing MUDs and other districts’ access to residents: It would require them to hold meetings inside the district boundaries or at a location within 10 miles of it.
For Gordon, who fights his appraisal every year, the most important reform will be the one that makes a difference on his tax bill. But even then, relief may come too late for his family.
“As soon as the kids get older and move on, we are going to have to move elsewhere … for something more affordable,” Gordon said. “It’s not the town it used to be.”