Tax Equity and Governmental Credibility

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We in Travis County, and indeed in Texas and in the United States, are living in a time of shifting tax burdens.  Many talk of reducing taxes while paying little attention to the shifting burden such tax reductions impose on other taxing authorities and taxpayers.  For example, with the significant cuts being contemplated at the Texas Legislature, the burden of governing has been and will continue to fall more heavily on local governments and the property taxes that fund them.  Travis County government is confined almost entirely to property taxes to fund our courts, jails, parks, roadway network and assistance to the needy.  Travis County will almost certainly raise property taxes to at least slow the degradation of what were once state services while maintaining county services.

In preparation for a likely property tax increase, Travis County undertook an equity examination of our current property tax policy and developed options for addressing any inequity.  In June 2010, the Commissioners Court formed a tax policy working group which met throughout the remainder of the year and brought recommendations to the Court in early 2011.  Our options are few.  The Texas Constitution requires all taxes to be “equal and uniform,” meaning counties are prohibited from considering one’s ability to pay in appraising properties or assessing taxes.  Counties are granted “one size fits all” tax relief options in broad categories of people or property:

  • Homesteads;
  • Agricultural Lands;
  • Veterans;
  • Senior Citizens and the Disabled; and
  • Historic Properties

Travis County utilizes all of these options.  The two options identified where we have room to provide more equity are in exemptions for:

  • Senior Citizens and the Disabled; and
  • Historic Properties

Senior Citizens and the Disabled

Travis County discounts the tax appraised value of homes owned by people 65 and over or disabled by $65,000 (the City of Austin, by comparison, exempts $51,000).   These exemptions, last increased in 1994 to $65,000, were originally intended to all but eliminate the average county property tax liability for senior citizen or disabled property owners (average value of a homestead in 1994 was $81,250, minus the 20% homestead exemption, minus the senior citizen or disabled exemption).  While the Texas Constitution requires that taxes be “equal and uniform” without respect to ability to pay, limiting the exemption to a capped amount at or under the average home value increases the probability that the policy has a greater benefit for those most burdened by property taxes.

Our tax policy working group has suggested we consider increasing the exemption cap to an amount closer to the current average home value of $270,000.  The working group suggests a $10,000 increase from $65,000 to $75,000.  Although modest, each $10,000 increase in the exemption shifts $1,747,602 onto the rest of Travis County taxpayers, a shift we must not take lightly.  The working group has suggested that reductions in the historic exemptions provided to roughly 500 property owners could cover the $10,000 increase in senior or disabled exemptions provided to roughly 40,000 property owners.

Historic Properties

Travis County’s historic exemption policy was implemented in 1974 .  Unlike the senior citizen or disabled exemption, the historic exemption is not capped.  It discounts the tax appraised value of a home designated historic by 100% of the improvement value and 50% of the lot value.  The tax appraised value of a commercial property designated historic is discounted by 50% of the improvement value and 25% of the lot value.  Federal, State and City of Austin designations are recognized (the City of Austin is the only Travis County municipality that has a designation program).  The exemption is available without regard to the condition or marketability of the property.

The policy was implemented to create a market incentive for historic preservation.  Properties designated as historic may not be destroyed or their historic facade materially altered without the approval of the designating authority.   Without the designation and the subsidy that goes with it, some historic properties would be razed to make way for more marketable uses or left unused and deteriorating because of an inability to compete for residential or commercial tenants.  Tax incentives can encourage rehabilitation and adaptive reuse of iconic structures that might otherwise be lost in changing markets.

Since implementing the Travis County policy in conjunction with the City of Austin three decades ago, more than 500 structures have been designated historic, thereby insuring that they will not be destroyed or their historic facades materially altered.  95% of these structures are in Central Austin. The policy has resulted in significant preservation but only in a small area of one city within Travis County.  The Travis County exemption is probably too large, inappropriately applied or no longer needed for certain classes and locations of property.

Moving Preservation Emphasis to Other Parts of Travis County

85% of the structures designated historic are clustered in the 78701 zip code or immediately adjacent zip codes within Central Austin.  This is not surprising since the bulk of Austin’s history prior to 1930 occurred within the 78701 zip code, which covers the original grid for Austin laid out by Judge Edwin Waller, its first mayor.  But, Travis County’s history is not confined to this area.   Given the success of preservation in Central Austin, it is time for Travis County’s policy to place emphasis on other historic locations within the County.

Realigning Incentives for Maximum Effect

The arguments for the exemption of taxes for historic structures in the commercial heart of municipalities is strong.  In many instances, commercial or residential utilization of these structures cannot compete with newer buildings in the commercial core that can provide amenities and layouts now preferred by office or residential high-rise tenants.  Preserving these treasures from the beginning of Austin’s history will likely require continued subsidy.

In contrast, many but not all of the residential structures currently enjoying historic exemptions meet the current market preferences for homes in their neighborhood and therefore do not require tax incentives for their continued preservation.  The average value for homes designated as historic in Central Austin is between $800,000 and $1.1 million, three to four times the average value of a home in Travis County.  The median values of historically designated homes in neighborhoods adjacent to downtown Austin are 65% to 122% higher than homes in the same neighborhood.  Meanwhile, homes in these neighborhoods tend to sell faster than most other parts of Travis County.  Tax incentives for already well-preserved historic homes in sought-after Central Austin neighborhoods are no longer necessary.  Appropriate zoning by the City of Austin is a better tool to maintain the historic housing stock brought back from the brink by three decades of successful tax incentives.

Conclusion

In general, tax incentives do not decrease overall revenue but rather shift it onto the remaining taxpayers.  A tax benefit that is not all it should be (the senior citizen or disabled exemption) or is more than it should be (some categories of historic exemption) exacerbates inequity in the already “one size fits all” distribution of property tax burdens.  Achieving maximum equity in countywide property tax policy requires ongoing examination and periodic adjustment.  The details and timing of any county adjustments will occur with full knowledge and input from fellow taxing entities and affected citizens.  We will do all we can to lessen uncertainty.  However, no tax policy is or should be perpetual and unchanging.  We must respond to economic forces and the changing capacity and preferences of the community.  Confined essentially to the blunt instrument of property taxes, Travis County policy must work harder to search out equity, particularly as we contemplate a higher tax rate to meet current and increasing community needs in criminal and civil justice, health and human services, parks, open spaces and transportation.  We should preserve our history, but not at the expense of our future.

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