Issue
Texas real estate is in demand, and the increase in value is what makes property in our state such a great investment. However, some legislators want to lower the current 10% appraisal cap rate to 3% or 5% under the guise of limiting the property tax bill of a residential homestead. Further artificially limiting the appraisal value of a home through a government overreach program sets a dangerous precedent.
Unfortunately, these proposals guarantee an automatic annual increase in a property tax bill. Appraisal caps also shift the property tax burden of higher-valued properties to middle-class homes, which typically do not appreciate in value as much as higher-priced homes.
What does this mean for the real estate industry?
Vilifying appraisal increases is dangerous rhetoric and can lead younger populations to shy away from homeownership. Value increases in real property are signs of a robust local and state economy and lead to greater building of wealth.
In fact, a 2018 Journal of Economic Perspectives article that focused on U.S. homeownership and financial benefits concluded that “… homeownership is a valuable institution. On average, it allows families to build wealth and serves as a measure of financial security.”
The Texas REALTOR® position
Our association opposes efforts to reduce the property-tax appraisal cap from its current level of 10%.
Legislative outlook
Expect several bills to be filed relating to lowering the appraisal cap for homestead properties. These bills may also try to extend the appraisal cap to all real property in Texas. These efforts are attempting to rein in increasing property tax bills, but legislators should instead focus their attention on the process to set tax rates at the local level.
Historical perspective
A limit on appraisals was enacted by the Texas Legislature in 1997, and was fully implemented for the 1998 property tax year. The cap on appraised values is currently applicable only to residential homesteads. Past legislatures have correctly turned away these types of ill-advised proposals guaranteeing an automatic increase in local property tax bills.
While the political pressure to lower the appraisal cap percentage may be great, there are consequences. Appraisal caps do not address the underlying problem with our current property tax system. Appraisal caps would merely limit the increase in value a residential homestead could experience.
Lowering the property-appraisal cap also creates havoc within the appraisal system.
A recent report from the Real Estate Center at Texas A&M University outlines the detrimental impacts various tax plans following this model would have on the Texas economy.2
According to the report, “[a] proposal to cap value increases at 5% per year similar to the California Proposition 13 model offers a promise of relief from climbing taxes, but the cure could produce undesirable side effects in the long run” and “… would work to distort housing purchase decisions by keeping property taxes low for long term residents.”3
The report’s conclusion found that the prospect of appraisal caps “threatens to impact the marketability of new homes and retard demand for new development by increasing the burden of purchasing new homes or even moving to another existing home. As time passes that impediment would continue to grow into a sizable distortion of the housing market.”4
1 “Homeownership and the American Dream,” Journal of Economic Perspectives, Vol. 32, No. 1, Winter 2018. http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.32.1.31
2 “Property Taxes: The Bad, The Good, and The Ugly,” Real Estate Center at Texas A&M, 2013. http://assets.recenter.tamu.edu/documents/articles/2037.pdf
3 Ibid
4 Ibid