80. Eco Devo: Ending Property Taxes & Chapter 313 in Texas
TX House Ways & Means Committee is meeting on Thursday 9/8 to discuss property taxes related to SB 2 & Ch. 313 handouts. Best eco devo is limiting government spending & eliminating property taxes.
Hello Friend,
I hope you’re having a prosperous day. This newsletter will focus on the upcoming Texas House Ways & Means hearing on Thursday, September 8, 2022. You can find more information about it here and submit your public comments electronically here. Let’s get to it!
HOT TAKE
Overview: This Texas Ways & Means Committee hearing is a great opportunity to be a part of the process. Here is an overview of what will be discussed during the hearing:
Focus: My comments are focused on 1) SB 2, which provided valuable reforms to local property taxes through increased transparency of these and a 3.5% tax revenue limitation for most local jurisdictions; and 2) Chapter 313, which provides a property tax abatement by a school district to reduce the tax liability for a specific company.
Affordability Crisis: Local property taxes are a major issue for affordability in Texas, as the Tax Foundation recently ranked Texas as having the 6th most burdensome property taxes on homeowners (or the 6th highest property taxes paid as a percentage of owner-occupied housing value using 2019 data).
And the 14th most burdensome property taxes on businesses according to the Tax Foundation’s property tax component rankings in its 2022 State Business Tax Climate Index.
And property taxes in Texas have indeed been soaring over the last 20 years in each jurisdiction and overall compared with the average taxpayer’s ability to pay for them as measured by the key metric of population growth plus inflation. With inflation running at 40-year highs, Texas families won’t be able to afford these increases for much longer.
This was a reason that the property tax reforms in 2019 of Senate Bill 2 (cities, counties, and special purpose districts) and House Bill 3 (school districts) were so important. And there is no need for Ch. 313 deals as the best economic development is to cut and ultimately eliminate property taxes by limiting spending and either using surplus dollars to buy them down over time or swap them out with a broader sales tax base (which may not be possible for some localities but certainly would be for school districts by the state and for larger jurisdictions by local governments).
Senate Bill 2 provided good reforms but needs improvement. It was passed by the Texas Legislature in 2019 and was meant to help slow the growth of these soaring local property taxes. The key reforms in the bill were to:
Improve the appraisal process, provide information online and send a postcard to everyone with the property tax information, and clarify the language of the property tax rates to the “no-new-revenue tax rate” (the tax rate that would collect no more tax revenue than was collected in the prior period based on the new appraised property values) and the “voter-approval tax rate” (the tax rate that would be the threshold for which voters would need to approve of a higher tax rate that would collect more in tax revenues based on the new appraised property values), and
Reduce the voter-approval tax rate from 8% to 3.5%, which has been close to the compounded average annual growth rate of population growth plus inflation over the last 20 years, and make it an automatic election to go above that rate. There were exclusions such as for a “special taxing unit” that was for specific local taxing units like a junior college district or a hospital district, which would keep the 8% voter-approval tax rate. And these special taxing units and cities with a population of 30,000 or more that wanted to go above the voter-approval rate would need to hold an election for voters to approve or reject the local entity’s adopted tax rate, which if it was rejected then the rate for that year would be the voter-approval rate.
SB 2 was a tough fight as Chairman (Senator) Paul Bettencourt and Chairman (House) Dustin Burrow put up a valiant fight against many local government officials and the Texas Municipal League. They came out in droves to testify against the bill, claiming it would result in less taxes collected for them to fund many first responders and a host of other erroneous claims. Of course, the real problem was that these local officials wanted to spend too much instead of making the tough choices to spend within the average taxpayer’s ability to pay for spending. This was evident in several recent studies that showed most of the large areas of Texas, including the county and city, have been spending well above population growth plus inflation, so it is no wonder property taxes are soaring. The following table is from a press release by the Texas Public Policy Foundation that shows the differences between spending in each of these entities compared with population growth plus inflation over the last decade in terms of the percentage-point difference, cumulative difference per person, and cumulative difference per family of four.
Recommendations related to SB 2: While the growth of total property taxes did slow to 3.5% in 2021, there were “loopholes” in 2020 and 2021 that some localities used to exceed the voter-approval rate without an election and this was closed in 2021. There is more work to do, including 1) Impose local spending limits based on population growth plus inflation that would reflect SB 1336 which was passed for the state in 2021, 2) Reduce the voter-approval rate to the no-new-revenue tax rate and include certificates of obligation (i.e., non-voter approved debt), and require that all jurisdictions hold an election to exceed it so that local politicians must explain to voters why they are raising any property taxes, and 3) Eliminate property taxes by using most if not all of the $27 billion in general revenue state surplus to buy down the school district maintenance and operations property taxes and do this every session until these property taxes are eliminated (or swap them with a broader sales tax base), and require cities, counties, and special purpose districts to use their surpluses to buy down their own property taxes until they’re eliminated.
Chapter 313 agreements must remain dead. The 87th Texas Legislature did a tremendous feat by not extending these handouts of taxpayer dollars by politicians to specific companies in 2021. That means that Ch. 313 agreements are set to expire in December 2022. However, there are politicians and businesses crying about this because it gives them less to write home about and try to get reelected while taxpayers pay for this cost, as there’s no free lunch and no free Ch. 313 deals. “Capitalism is the best path to prosperity,” as my former colleague Larry Kudlow at the White House used to say. We should remember that we want Texas to be a bastion of hope and prosperity for the world that comes from capitalism, not extractive institutions in socialism that Ch. 313 and similar deals smell too similar.
Recommendation related to Ch. 313: Don’t extend Ch. 313 after it expires in December 2022 in any form because they are not a role of government, distort market activity, and will be obsolete when school district M&O property taxes are finally eliminated.
Ultimately, Texas does a good job when it comes to keeping spending and therefore state-local tax burdens low as the Tax Foundation ranks Texas as having the 6th lowest state-local burden in the nation.
But given how high local property taxes are and the excessive spending at the local level, this lower state-local tax burden is really a function of the state spending within its means over time (could always do better) and ensuring that Texas never has a personal income tax (needs to eliminate the business margins tax, which acts an income tax). By effectively limiting spending at the state and local levels, improving on the valiant work to get SB 2 done, and keeping Ch. 313 dead in any form, Texas can have tremendous economic development where everyone can be a winner and the economy can roar far into the future so that there are more opportunities to let people prosper.
BOOK TAKE
The issues surrounding handouts of taxpayer dollars by politicians to specific companies have been well-researched over time. Nathan Jensen who is a professor in the Department of Government at the University of Texas-Austin has been writing about this issue for a while. In particular, he has noted that the vast majority of companies that received a handout through a Chapter 313 agreement from a school district were going to move to Texas anyway. Instead of the agreement being a significant reason why the company moved to Texas, it was more of a sweetener on the deal as it was going to move to Texas so it may have chosen the school district that gave it the biggest tax savings. Of course, this means that someone else must pay for these “savings,” because nothing is free. The ones who pay are the taxpayers in the school district along with the local businesses that didn’t get the same sweetheart deal. His book Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain provides a good overview of his research.
Dr. Jensen doesn’t consider just Texas but the U.S. and other countries. Ultimately, these forms of handouts by governments of taxpayer dollars must end. Picking winners and losers, such as the Texas Governor’s Texas Enterprise Fund and Ch. 313 agreements, is not a role for any level of government. Instead, the focus should be on removing obstacles created by the government through limiting spending, cutting taxes, and removing regulations so that there is an incentive for economic development by every individual and business, which is just a coordinated effort by a group of individuals.
TAKE ON STATE ECONOMIES & POLICIES
If you’re not talking about property taxes in TX, you’re not talking to Texans.
More states are trying to compete on taxes in the system of federalism. Great!
There’s too much spending and taxing by local governments in Texas.
Property taxes are too high because local governments spend too much.
Property taxes aren’t too high because TX doesn’t have a personal income tax.
TAKE ON U.S. ECONOMY & POLICIES
Excessive fed spending is coming home to roost in the Treasury market.
Gasoline prices are falling, but not for good reasons.
Fed doesn’t let people prosper. Rules would help until ending it.
More inflationary pressures are in the pipeline from Fed’s failures.
What is greed? It’s when the government spends and taxes too much!
PERSONAL TAKE
The family and I are doing well. It’s my first week not working nearly full-time somewhere since I was 16, except for a semester in college. It’s quite nice so far as I’ve been doing some contract work and considering options for full-time employment. Please share with me if you have any insights or ideas. But one thing that has been on my mind since my previous newsletter when I wrote about the next chapter in my career is this: We need less government in every part of our lives and economy to support increased liberty and to let people prosper.
CLOSING TAKE
A good reminder from one of my favorite economists, Pete Boettke. He will be on my Let People Prosper show soon (check out my previous episodes and subscribe on YouTube, Spotify, or Apple Podcasts).
I’m praying that more of this will confess that Jesus is Lord.
Thank you for reading and sharing this newsletter. Many blessings to you and yours!