The Legislature has passed, and now the Governor has signed H.B. 380, amending Chapter 42 of the Tax Code, fundamentally altering the way the property tax system in Texas works.
Nearly 40 years ago the Legislature created the property tax system that we have today in Texas. It resolved decades of inconsistent and politically influenced practices that often resulted in unequal and inefficient taxation. That system created by 1981 was and has been probably the best in the nation. It has resulted in much greater equity, much more professional practice, and much better opportunity for property owners to participate meaningfully in the process.
A key element of that system has been the principle of exhaustion of administrative remedies. That is, property owners are annually given fair notice of the values and other factors that affect their taxes and are given the opportunity to contest those values and taxable status before an administrative body known as the appraisal review board (ARB). Property owners have been charged with making timely protests and appraisal review boards charged with making timely reviews and decisions such that 95% of the value is resolved by July 20 of each year. If the property owner or appraisal district is not satisfied with the ruling of the ARB, they have the opportunity to take the issue to District Court. But, historically, the vast majority of disputes have been resolved at the ARB level. In my experience, the ARBs very often give relief to the property owners in some form.
But timely completion of the process is a critical element. By July 25, the chief appraiser is charged with certifying to the taxing units a roll of taxable property that is 95% complete. This is critical so that the taxing units, the counties, cities, school districts, and special districts, know how much value there is to tax, what the tax rate needs to be, and what budget they can fund. Those budgets fund our schools, much of our highway infrastructure, law enforcement, courts, municipal services, etc.
H.B. 380 has disrupted that system significantly. Now, a property owner may protest, at least according to the plain reading of the bill, any issue any time. If the ARB dismisses the protest as untimely, the property owner may ask the District Court to instruct the ARB to hear the case anyway. There are no parameters in the bill for directing the District Court when to grant such relief. Thus, the chief appraisers of this state may no longer confidently certify a taxable roll to the taxing units by July 25, or any time.
Responsible property owners will probably still protest timely. But the remedy created by H.B. 380 allows property owners, particularly owners of very high value properties to very realistically cripple the counties, cities and school districts by contesting values for multiple years in arrears. For example, consider the power plant in the small rural district that constitutes 50% of the local county tax roll. If suddenly, many years after tax rates have been set and taxes collected, the plant owner decides to contest the value four years into the past, what that owner is essentially doing is putting 200% of the county’s annual tax base into question. A significant loss in value of that magnitude could be catastrophic for the county, city and school district, and cause massive tax increases on the rest of the property in the county. The school district could pass a significant part of the loss on to the state. But the other districts would face the possibility of a Chapter 9 bankruptcy.
The concept of exhaustion of administrative remedies is common in the law. Many state agencies have an administrative process by which aggrieved citizens can contest the actions of that agency. Those processes are frequently far more weighted in favor of the State than the property tax system which is designed to give property owners meaningful review. What the State is doing in the passage of H.B. 380 is passing a potentially enormous expense and budgetary uncertainty on to the local governments which the State is not willing to take on itself.
The Legislature seems to have the conviction that the property tax system in Texas is broken and needs major revision. The system has not been broken, but is being severely burdened by legislation such as H.B. 380. At some point, the system will fail from the complications imposed by such legislation. The problem with property taxes up to the recent years has been that we, as a State, rely very heavily on them. Thus, they are comparatively high, just as our sales tax is comparatively high. The property tax has been an easy target of the Legislature since it is entirely a local tax. By doing such things as passing on the costs of education to the local school districts, the State can keep its tax rates low while forcing the local property tax higher. Then the Legislature has faulted the property tax system as a whole as being the problem. The problem is lack of state funding for education and infrastructure.
There are three basic forms of taxes: 1. a tax on consumption, 2. a tax on income, and 3. a tax on accumulated wealth. The property tax is a tax on accumulated wealth. Other than the small franchise tax, we have no tax on income in Texas. We already have a high sales taxes, a tax in consumption. If the Legislature breaks the property tax system’s effectiveness, we will be left with having to devise either much higher consumption taxes, or another form of tax. That primarily leaves the option of an income tax. That idea has not been palatable either.