Hello, and welcome to the Texas Tribune Tribe Cast for Tuesday, January thirteenth. I'm Eleanor Klibanoff Law and politics reporter, joined as always by Editor in chief Matthew Watkins.
It's going well, yeah, yeah, we're talking about my favorite topic. Yes, well, I was gonna say.
I mean, one of the great joys of being a Texas politics reporter is even numbered years where you get to watch your colleagues across the country go back to their state capitals and cover legislative sessions and we get to just, you know, totally check out, basically, take a year off. Nobody's talking about anything interesting, nobody's really getting that into politics at all.
Frankly, no, if only that was the case.
Our beloved elected officials are giving us no time off. Obviously, we have the twenty twenty six primary election in like thirty five minutes from now, and it's becoming increasingly clear what the main topic for the twenty twenty six election, and obviously the twenty twenty seven legislative session is going to be, and it.
Is property taxes.
Property taxes, which you know, just already we've got our elected officials at each other's throats about this.
And I would just like to know that I have no idea what that drum roll sounded like to our podcast.
I realized relatedly, that's probably the worst thing you can do other than like chew gum while doing this, So sorry about that. You know, this is going to be just a very very important topic. That's we're already getting very in the weeds, like shockingly in the weeds, considering we are a year out from the next legislative session. To talk about the different proposals that are different lawmakers are talking about and why this issue just continues to
be such a hot topic in Texas. We are joined by John Diamond, the senior director of the Center for Tax and Budget Policy at the Baker Institute.
John, thanks for being here.
It's a pleasure to be here. Thank you for having me.
Yeah, I mean, for all we talk about property taxes, and that our state wide elected officials talk about property taxes. You know, Texas does not actually have a statewide property tax. We have local taxes set by cities, counties, and school districts that pay for a wide range of services that many other states choose to cover with income tax, which we obviously don't have, John, maybe you can sort of give us a little bit the lay of the land on where things stand now before we get into all
the where things people want things to go. This has been a big hot button issue in the legislature for a couple of sessions.
Now you know.
What property taxes do people in Texas have to pay and sort of what are some of the like Where have those recent fights taken us in terms of progress on that?
Well, so you mentioned I mean there's property taxes. Cities have them, counties have them, school districts have them, and we have these strange entities called these special districts, which include flood districts and many other smaller groups that impose a property tax on Texas residents. There's been a lot of changes since twenty fifteen. So we've had reforms in twenty fifteen, twenty nineteen, twenty twenty three, and twenty twenty five that have all aimed to reduce the bite of
the property tax on Texas homeowners and business business. It's done very little to lighten the voter disapproval of the amount that they have to pay in property taxes. And that's mostly because home values over that period have gone up substantially, have gone up faster than median incomes, and I think that's put a squeeze on the tax player budget. While counties, districts and other government entities also complain about.
Their budgets, one of the one of my favorite things to sort of say about property taxes is that they were perfectly designed to make people angry. Right, Like, when your sales tax bill goes up. I mean, I know you don't get a sales tax bill, but when the amount you're paying in sales tax goes up, it's because you're buying more things, which is fun, and you get
some stuff out of it. Right, If your federal income tax goes up, it's probably because you've gotten a raise, right, and you again, like you might not feel it, and you might associate it with a good right, But your property tax cut, your property tax payments can go up without you doing anything or realizing any immediate benefit. Right, you buy a house, you're the value of your house
goes up. That's good, right, it raises your net worth and all that, But it's a benefit that you can't realize until you probably sell the house or I guess maybe like take a loan out on the House or any of those types of things. Right, but your taxes already go up, and that's just an incredibly frustrating thing
to experience. You're like, I didn't do anything here, but my tax bill went up, and like that to me is like the reason why basically we're in this world right now where we can talk about what Greg Abbott wants to do here in a minute, but basically, like, basically politicians are asked every year, no matter what they did the previous session, what are you going to do about my property taxes? Because that frustrating growth continues to happen.
Yeah, I mean I'm curious and like Johnny, like since twenty fifteen, we've seen a lot of these reforms. I think for a while before that, you know, there were people calling for property tax reforms. It did not have as much political salience as it does now. No one is ever happy when they get their tax bill. Is what change that brought made things start moving on? This that made is an actual political have some more political pressure behind it.
You know. Again, I'll go back to the rise in housing values and how much faster housing values were rising than income, and so you know that yearly hit when you know, so when housing prices go up, you kind of double WHAMMI in that if you move to a new house, you know, you have to pay more for your mortgage. And then on top of that, we were in a very low interest rate period, so houses were
very cheap in terms of the monthly payment. But then starting in twenty seventeen, intrat rates started to creep up, and then they after COVID, they ramped up fairly quickly, and that made owning a house even more expensive. So all of the additional cost added to this yearly property tax payment that was going up rapidly and faster than people felt they could afford. Even though during that period the state government kept saying, we're going to solve this problem.
Here's you know, we're going to compress the school tax rate by ten cents. We're going to raise your property tax exemption from you know, fifteen thousand to twenty five thousand to forty thousand to one hundred thousand. But taxpayers continued to feel, you know, the pressure of higher property tax payments, even though the state government was telling them we're acting, we are going to solve this problem. We're going to bring these taxes down, but they've been relatively ineffective.
I mean, they have brought them down some, but the increase in house prices have just eaten away at that over that same time period.
I mean, I think what we're hearing now from some sort of loudest voices is, you know, eliminate property taxes, right, I mean a little bit more rhetoric around like you're basically paying the government rent to live on your private property.
I feel like there's a little bit more of a hardened ideology forming around this that you know, property taxes are you know theft or you know theft from the government, And is there a world in which you know we're going to go through again the specifics of the plan for like, here's how we could pull some of this back. Can Texas eliminate property taxes? And what would happen if we just were like we're done allowing you know, anyone to tax your property.
So I've written two papers on this, so I would run a total repeal of property taxes. So if we were to eliminate property taxes and replace them with an increase in the sales tax rate but no other change, so we don't broaden the base. We don't reduce expenditures. It's just a swab sales tax for property tax. And you know, the results I got were that you would need about a twenty two percent rate, assuming that there's
no evasion of the higher sales tax rate. But we know from the literature that if you raise the sales tax rate to twenty two percent, people are going to avoid and evade that tax. And so if you just build in a very modest amount, say ten percent, evasion of the sales tax, that the rate would need to go to twenty six percent. And so that is to replace the roughly eighty billion in property taxes that are collected at all levels, city, county, school district, and special
purpose districts. I read another paper in I think it was around twenty seventeen, it maybe twenty eighteen that looked at just replacing the O and M portion of school tax. So this is roughly forty billion dollars. And in that paper I allowed the sales tax base to be expanded.
I think I took it from about sixty percent of goods were tax to write around seventy leaving a bunch of the most controversial or the most desired goods that people want to be untaxed, like food, and so worth leaving those untaxed and just expanding to things like services and that kind of thing. And that raised the sales tax base to about seventy percent of total final sales. And then I reduced expenditure by a small amount each year.
And in that paper I estimated that you would need to raise the sales tax just to get rid or just to eliminate the school tax, the operations and maintenance tax by about you'd have to rise it to about nine point seven percent, So it's about a percentage point and a half that is actually doable where complete elimination of school district taxes as well as city count and special purpose districts, raising the rate to twenty two or twenty six percent is not feasible. I mean economically that
would not work out well. The inefficiencies in that system would be much larger than the inefficiencies in the current with a property tax system. And so I think that's where we are. So is it reasonable to think in other states? And we actually know this is true. So if you a state like Michigan and lots of other states,
actually they don't fund schools locally through property taxes. So we could easily fund our education system at the state level and carve out, or get rid of, or eliminate the property taxes for school districts at a local level, although you would still leave property taxes to finance long term debt, so things like building school buildings or sports stadium their football stadiums or whatever, those could still be
financed by property taxes at the local level. And I will point out that one of the problems with replacing all property taxes is on the back end. So once you replaced the taxes, let's say we replaced all property taxes with a sales tax, we raise the rate to twenty six percent. The state then has to allocate that money. And how do you allocate that money between cities, counties, special purpose districts, and school districts. That's a very complicated formula.
It's one California has had to deal with post Prop thirteen and nineteen seventy eight. And what they do, the way they do it, when you actually look at it and look at the data is pretty strikingly bad. Like it's something we definitely want to avoid. So I will stop there. Well, I mean yes, it is possible in some sense, but not in a total sense.
Right.
I mean, I think.
You eventually have to pay for some government services, right, like some the money has to come from somewhere. And to your point, yes, I mean I think sales tax is more appealing in that like, well, you're at least getting something. But a twenty you know, twenty five thirty percent sales tax increase I think would.
I don't know that people would love that?
No, probably not. And I mean it's worth noting that in twenty nineteen, I might be getting the date wrong. You can correct me if I am the Big Three At the time, Speaker bond In I believe, Speaker Or and then Lieutenant Governor Dan Patrick Governor Greg Abbott proposed increasing the sales tax by one cent, essentially in an effort to buy down property taxes. They did this late in the session after there was a big push to reduce property taxes, and it quickly generated major pushback and
ended up failed. So if they can't get a one percent increase, a one cent increase, can you do a twenty two cent you know, sales tax? I would be highly skeptical of that. The other thing that I think is worth noting here is that sales tax is also a very regressive tax, right, and a poorer people pay a higher proportion of their incomes towards sales taxes than
they do, you know, other kinds of taxes. You know, whether that would be a concern of say, lawmakers or not is hard to say, but another possible drawback from doing that.
And like, I mean, just when we think about I mean, I rent my apartment. I understand that they're you know, in the long run, people say, like property tax reform does eventually help renters, you know, you know, all all of that. But at the end of the day, if I'm you know, I don't have to pay a property tax bill every year, but if I have to pay twenty two percent more every time I go to the grocery store, that's sort of more persistent annoyance, which obviously,
as we're saying, sort of a non starter. But I think for the people who are saying, you know, abolish property tax, not anything less is unacceptable, I haven't heard a ton of sort of sitting with the reality of what that might look like.
John, I wanna ask you what we need another revenue source. I mean, you definitely need to replace at least a large portion of the revenue. So maybe there would be some spending cuts that could all sets for sure, you know. But another problem with the sales tax that doesn't often get attention is that about forty percent forty to fifty percent of the sales tax space is on business purchases, and so you know, as economists, we call that a
cascading tax, and those are not very efficient taxes. And so the sales tax system does have its wards, and that makes it actually hard to raise the rate too much more than where we have it. I think you could go to around ten percent, although I agree with Matt politically that's a much bigger lift than it is economically. But I think that's where you're capped. Anything over ten percent and there's going to be some major inefficiencies that creep into the system more so than we currently have.
And so my view is that you really would need to replace if you really wanted to eliminate property taxes, you would need to replace the sales tax with a more efficient version of a consumption tax.
John, I want to ask you talked to about how you know, if you get rid of property taxes, you have to replace it. I mean, for the last let's say, seven or eight years, the state has essentially been able
to lower property taxes for free. It's not for free, of course, because we're spending money on it, but economic growth in taxes has been so significant that they have had the surplus revenue largely from sales tax increase spending and you know, maybe some inflation that is driving increased sales tax revenues as well, that they've been able to take money from the sales tax pool and use it
to buy down property taxes, specifically in schools. The number that was sort of you know, reported by the Legislative Budget Board last year was the state has essentially committed in recent sessions fifty one billion dollars in order to
do this. I think there are a lot of people asking the question of like, is that era of sort of free property tax reduction still possible given where we might be economically right and that you know, the sales tax revenues other revenues in the state might be stagnant or even down next year in twenty twenty seven's, it might be very hard to even continue paying for the cuts that we did these past few sessions. Let alone significantly reduce school property taxes, or as Governor Bett is asking,
completely get rid of them. I wonder if you could just sort of reflect on that situation for me. Do you feel like the way I've framed it is accurate? How does that factor into these conversations do you think going forward?
I think you've framed it pretty well. So, starting in around twenty a little before twenty seven, we started to see an increase in sales taxes. This was partly due to the way that we treat online UH sales, and that actually led to a significant increase in sales tax revenues by taxing anyone that sells goods online that has a nexus in Texas UH. And so we've seen this surplus of revenues both because of higher sales tax revenues
as well as the other big revenue increase. It wasn't a revenue well, it's a it's a money increase in Texas was the large expansion in fiscal health from the federal And so when you look at Texas's budget, about a third of it comes from inner governmental transfers from the federal government, and so we had a huge expansion in that we collected more revenues from the sales tax, and so we've run you know, really large surpluses for much of the past eight or nine years, with the
exception maybe of twenty twenty. And so those surpluses have been used to buy down the tax rates or expand the homestead exemption. And yes, it has seemed much like it was a free you know, a free property tax break. But those are revenues that are being collected from either taxpayers here in Texas or in the case of the federal grants and subsidies, taxpayers in the US. So you know, we all know there's no such thing as a free launch.
But overall, I thought your explanation was was pretty much spot on.
I mean, as we've sort of continue to say in this conversation, where like the money does have to go come from somewhere, school districts, counts, you know, cities, counties do need money to pay for some things.
So how do you how do you then, like, let's let's talk specifically about Abbott's plan here, because you know he he rolled out in a press conference a big event late last year, this sort of idea of this is going to be my big issue in twenty twenty six, as I run for reelection getting rid of the school property tax, given all the context of you know what we just heard and what we just talked about, how possible do you think that is? How do you sort
of evaluate this proposal? As we you know this guy's probably going to win reelection.
We can well for sure anything as possible.
I'm not a gun of a crystal ball, but let me just briefly go through the three main prongs of his proposal. So, the one prong, as we've talked about, accounts for sort of the largest chunk of most people's property bills, which is school district taxes. Abbott wants to allow voters to decide whether to abolish school property taxes on homeowners because he believes the state's collecting enough revenue
to sort of backfill that money. They want to make it harder for cities and counties to raise local taxes by requiring a two thirds vote at the ballot box, which, as one expert that our colleague Josh Vector talked to, said, basically, there's no way that would ever pass in most places, so you're really tying people's hands. And then also put a cap on property on the increase in property values so that your property value cannot increase more than three
percent a year and it's a praised value. Some of which experts say could work, some of which they say, you know, would likely be a problem.
Is you sort of alluded to?
But yeah, I mean, so what do you of these you know, three prongs, John, What do you sort of make of the feasibility putting aside, honestly the politics of it, just of this effectively lowering people's property tax bills and also continuing to get people the services that they expect.
Well, you could definitely, you know, is it feasible? Let's just start there. It's absolutely feasible, you know. I mean, I've written a paper on replacing the school M and O property tax and it could be done. It would require some base broadening on the sales tax side, and a reduction and expenditures to keep the rate below ten percent.
When you say base blinding, do you basically mean like increasing the tax rate?
No, I mean increase See the number of goods that are subject to the sales tax, so you know the age old. The one that comes up is you could tax services like golf lessons, gotcha? Other types of lessons. There's a lot of services that are untaxed that we could include and that would bring in additional revenue at the current rate.
Underson.
You know, I have proposed before switching from a sales tax to a value added tax, and actually that this was proposed by Governor Bush back in nineteen ninety seven, I think it was. It didn't last very long politically, but a value added tax would would be a more efficient version of a sales tax. That would both be more efficient on the business side and it would allow for collecting more you know, more or stages of the
production process. But that's another discussion. So it is feasible, you know, the appraisal cap I mean, so let's say it is feasible. Obviously, there are the problems with expanding the sales tax rate too high. You know, appraisal caps. We know that those are fraught with problems, especially a three percent cap. You know, would it work to bring down people's taxes, Yes, it would work to bring down some people's taxes. If you buy a house and you stay in it for a long time, you would see
a tax reduction. But if you have to sell, or if you're an entrant into the housing market. Then you know, your property would pre ap pray would reappraise at market value, and so there you would end up with the haves and the have nots. The havelves would be the people that locked in a really low value and they would get locked into their house, much like people are locked
into their houses with low interest rates. So because you have this financial benefit of a really low appraised value, it becomes too expensive to move to a new property, just like currently we see people with really low mortgage
interest rates. They just can't afford to move out of their house because you know, going from a you know, a three hundred thousand dollars house with a two percent mortgage rate to a three hundred thousand dollars house with a six percent mortgage interst rate is not feasible for their budget. And so you get what's called a lock in effect. And so all of this is feasible. The
problem is it's all from one side. I mean, so we're talking only about the tax side and state I mean in local governments also have a spending side to look at, and you know, those two things have to
align because they have to balance their budgets. And so there is you know, there is concern over that, but mainly for me, I mean, the problem on the tax side is that the way we're trying to do this is a little disjointed, and I really think the appraisal cap the appraisal caps bring in a lot of inefficient aspects that would you know, that would be detrimental to the housing market and for many people in the housing market, although it would benefit a fair number of people that
are able to stay in their house for a long time.
Yeah, I think a key point you made there too is right, like we talk a lot about this of like replacing revenue and everything like that. I'm sure Governor Abbott and other people who would advocate for this plan would say that this is you pay for this three different ways, right you You know, maybe there's some like tweaks to expanding the base, like you talk about. There's
also just the long ongoing economic growth of Texas. You know, you hear folks who have advocated for this talk about that, like Texas has had this economic miracle for you know, decades now, and that can help pay for that too. And then on the other side is of course reductions
and spending. You probably can't do this without some kind of you know, spending cuts in these areas too, which you know, when you're talking about schools is a is a difficult thing to do, and and we can certainly draw blowback well, difficult, difficult politically at least, whether.
I was gonna I was gonna throw in. So something we've seen here in Houston. Houston HISD just put out there data on their school population for this year and it's down by eighty three hundred students. That's a four point seven percent decrease in the size of their student body. Their student body has population has decreased every year since twenty fifteen. There's been no decrease in property taxes over
that same period. And when we look at the data that's out there right now, and this is you know, we talk about economic growth a lot, and one thing that everybody is kind of ignoring in the long term, which is a really important issue, is the reduction and fertility across the United States, here in Texas, everywhere in Japan, in Europe, pretty much everywhere in the world except Sub Saharan Africa, birth rates are below the replacement rate, which
means populations are going to be shrinking, and so the only way to continue growing the Texas population is to do it through immigration, and given current policies, I think I'm skeptical of how much immigration growth we're going to get in the next four years because at this point a lot of the immigration over the last five years has been concentrated in international migration, and I think we're going to see a lot less of that. So the only way to increase the population going forward is just
going to be through internal US migration. I don't know how much more gas is left in that tank, but I do know at some point, Texas, just like everywhere else in the world, is going to have to deal with and think about how do you plan for a shrinking population, because that is on the thirty year horizon, and when you're thinking about building school buildings and stuff like that, you need to be thinking thirty years out well.
And of course, I mean, we are talking to you from Austin, where you know they have been trying to close schools for years and that has been its own political fight as well. But another example of what you say, but I mean, I guess also presuming that we're talking about population decline, we're also probably talking about decline and
other types of revenues. Like, you know, there's likely a decline in economic growth or at least a slowing of economic growth there as well, that would affect revenue, you would think as well.
Yeah, I mean, you know, we've got I think an extraordinary amount of detail from Governor Abbott about how he would like to see this play out. We've also heard from Lieutenant Governor Dan Patrick with sort of I think an agreement on the principle, which is we should find a way to reduce property taxes, some pretty significant disagreements on how we should do it. Lieutenant Governor Dan Patrick has his plan called Operation Double Nickel, which you know he who names.
His plan first.
Maybe he comes out comes out a little in front essentially, which would increase the homestead exemption by another forty thousand dollars and allow people to qualify for the increased exemption you get when you are considered elderly or disabled, would lower that to age fifty five. The double nickel of that, and I mean Lieutenant Governor Patrick has said, like we can eliminate school property taxes over the coming years, we cannot eliminate all property taxes. We're not likely to eliminate
all property taxes and like remain fiscally solvent. So he sort of is ideologically different than Abbot in that regard.
Yeah, and you know, first of all, I feel like we're getting rid of property taxes, has like a bit more of a grabby ring to it, an Operation Double Nickel,
But we can discuss the branding later. I do think it's going to be really interesting to watch this from just a political perspective, right, because the story of twenty twenty four and twenty four elections was Abbot getting behind school vouchers as an issue and really really asserting his will so that when the next legislature came in, they were aligned with him, and he had sort of like shown his political strength in saying we're going to get
this through. The difference of course between you know, So now fast forward to twenty twenty six and Abbot is sort of signaling that property taxes, school property tax in general is like my issue like that as well. The difference between those two issues is that in twenty twenty four he was on the same side as Dan Patrick. Dan Patrick, you know, it was not a coincidence that Patrick called that press conference where he announced Operation double nickel.
You know, days, if not weeks after Abbott came out with his own plan, Right, they do not seem to be perfectly aligned right here, And how willing are these to you know, fight over this is going to be a really fascinating thing to watch over the next you know, year and a half.
Basically, and property taxes are just really complicated. Like I think it is easier to say are you in on vouchers?
Are you out on vouchers?
Versus saying, well, we all agree we want to reduce property taxes. We're all coming in from the same position. How are we going to do it? That's where the splintering happens. And I mean we saw that in twenty twenty three. I mean, disagreement over property taxes and how
to do it. You really messed up some reporters summer plans like we I don't think, you know, the nuance of how this gets done is going to be very monkey, very in the weeds and leave a lot of daylight between people who are like otherwise pretty ideologically aligned.
Yeah, and you know, I mean one of the things that they fought over this was Dade Feeling and Dan Patrick fighting back in twenty twenty three. One of the things they fought over was capping property values right, and
Dan Patrick was very passionately. You know, the nickname California Dad is a reference to the fact that California has property property value caps and a lot of people blame that, as as John was kind of referring somewhat earlier to a lot of people blame that on the the extremely high housing values in California, on that, you know, incentive to sort of stay inside your house. And so, you know, are we going to get a California Greg in twenty twenty seven. It'll be interesting to see.
And I think, you know, when I think back on that, I mean, so to think about the Lieutenant Governor's plan, you know how I like to state it is, it's not really a lot different. So you've got the double nickel portion. Well, all that does is freeze people's property values when they turn fifty five. So it's basically a redistribution of the property tax burden from people that are fifty five and older to people that are fifty five and younger. And that's similar, not exactly, but it's similar
to what you get under appraisal cap. You also get the lock in effect for people then that are fifty five and older, so they both redistribute property taxes to the younger generation. That they both cause some extent of a lock in effect, one depending on how long you've been in your house and one depending on your age and once you turn fifty five. It's not quite as powerful as the three percent cap, but it is there,
you know. The thing I like about the Lieutenant Governor's plan is that he did include a three point five percent cap on spending, so he just didn't the tack side. He also brought in a proposal to limit growth on the spending side, and I think spending limits such as Colorado's spending limit that they've imposed, has been much more successful at reducing the growth of the local government sector relative to appraisal caps, which I don't think have been
all that effective in reducing growth. And similar the homestead exemptions that we've passed in the last ten years, as well as the compression of the property tax right that have been passed in several sessions, those haven't done much to contain the growth of the local government sector either.
So I think the one great thing or the one thing I was pleased to see in Operation Double Nickel was at least some attention paid to both the tax and the spending side instead of looking slowly solely at the tax side.
And I'm largely joking about California. Greg, I do not anticipate Dan Patrick pulling out that nickname.
But give anybody any ideas.
But I think it is an interesting thing. You know, people have watched the delicate dance between Greg Abbott and Dan Patrick for years, and you know, how well do they get along, how much willing are they to work together. I'm not sure we have. In that twenty twenty three fight, you know, there was I think frustration from both the Speaker and the Lieutenant governor about whether Abbott should be being more vocal and sort of pointing the direction that he wants.
Now they figured that out will be interesting another yeah, you know, another issue that was raised in that really by Dad Feelin was that, you know, one of the biggest problems with all of these solutions is that and I wrote a paper on this, so that in twenty three there was the twenty percent cap on non homestead properties valued under five million dollars, and what you saw in that was that when you cap something like that. Any cap all it does is shift taxes somewhere else.
And this is true for expansions the homestead exemption as well. And so what we've been seeing in much of the last ten years is just a shifting of the property tax burden from households to businesses. And I don't think that's a sustainable way to reduce property taxes. And so at some point we're going to have to have some better plans than what our politicians are trying to sell us. But for now, this is the.
Best we have, and I think there will eventually be political pushback in Texas to continuing to put burden on businesses, right, you're not putting on individuals. Well, I think it is clear that this is going to be the issue of the year, the issue of next year, the issue of probably the next decade of Texans' lives, but certainly something we are going to continue to dig in on.
John. Thank you so much for joining us this week on trip Cast. We appreciate it absolutely.
Thank you for having me.
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