Award-Winner: Property Taxes: Garbage In, Garbage Out at Dallas Central Appraisal District

Why Property Taxes are so BAD

Last weekend, the National Association of Real Estate Editors (NAREE) awarded this series discussing state and local property taxes “Bronze” in their Best Series category.  While originally published in May 2016, a year later nothing has alleviated our property tax increases. 

Several weeks ago I wrote a pair of columns (here and here) about how the core math of Texas property taxes is fundamentally broken (and always has been).  While, A+B=C, if “A” is patently wrong, how can “B” and “C” be accurate?

In this case, “A” is assessed property value, “B” is property tax rate and “C” is the revenue required to run the city and state.  In Texas, without real estate transaction disclosure, “A” is always a bit of a crapshoot as DCAD pulls assessed values out of thin air.  Now I’m sure there’s some enormous algorithm they use to calculate values (a bottle of Jack, a blindfold and a dart board?) but in the end, not having access to the actual selling prices of real estate in Texas hamstrings a meaningful conversation about taxation rates.

As it is, property tax assessment districts in Texas have higher rates (“B”) than are actually needed because they have no visibility into “A” valuations.  Texas rates are high because the underlying assessed values are inaccurate.

Yesterday, the Dallas Morning News outlined how this year’s rate increases hit middle-income homes harder than higher income homes.  Color me shocked!  And yet, the middle class are just as vocal about keeping Texas’ system of non-disclosure in place.

For me, this was the most salient paragraph …

“Local officials say they are hamstrung by state law in trying to accurately assess commercial and high-end residential properties. Texas, unlike most other states, doesn’t require real estate sales prices to be publicly disclosed. Property owners who can afford pricey Realtors often demand nondisclosure agreements. State law also permits property owners who successfully challenge their appraisals to collect attorneys’ fees from the county.”

If non-disclosure died, here’s what would happen…

First, the state would take 3 to 5 years to change the system.  During that time, the state taxation districts would rebuild their databases of assessed values based on transactions occurring during that window.  From there, the state would reverse engineer the taxation rate.  If the state needs $X and property is worth $X, what rate gets us to that level?  Hint … it’s a rate a HELL of lot lower than it is today.

For example …

A $200,000 home taxed at today’s homestead rate of ~2.3 percent equated to $4,600 per year in property taxes.  But let’s say that home is really worth $310,000 … then the tax rate would only need to be 1.5 percent to reach the same $4,600 in annual property taxes.

I hear you saying … “If, after this exercise homeowners still pay about the same, what’s the point?”

First and foremost, accuracy.  Just as Realtors base selling prices on comparable sales, so would taxing districts like DCAD.  Rather than painting the Mona Lisa with a paint roller, assessed values and any annual increase/decrease would be accurately portrayed in their calculations.  In being able to “see the math,” homeowners and DCAD would be working from the same data … and be more accurate.

Being more accurate means FUTURE increases and decreases are felt more quickly in the system.  For example, in my cursory look through DCAD, it appears it took them a couple of years to begin reducing taxes during the recession.  Had they been given real data, those reductions may have happened quicker, saving homeowners money, and likely with a lot fewer tax protests. (Of course, like gas, prices go up more quickly than they go down. Funny that.)

Second, the wealthy, who are paying for property tax agents to tamp down their taxes, would have A LOT harder time succeeding.  The folks the Morning News said are “demanding nondisclosure agreements” on their multi-million dollar transactions would no longer be able to keep their traps shut.

Personally this is what galls me the most: The wealthy are the most able to pay taxes but are also the least likely to pay them.  Also, the infrastructure of the USA, from education to roadways to business opportunities, has enabled their wealth, and yet they are hell bent on not paying their fair share back into the system to pass those opportunities on to the next generation.  As I noted in my original columns, this was not the case in the past.  In eras when personal taxation was excruciatingly high, over 80 percent thought that was fair.  But that was a time before greed became god.

You’re afraid

I get that you’re thinking that if your property was assessed at 100 percent of its true value, then your taxes would go through the roof.  But I think that’s a false assumption. Even with our broken system, everyone from the mayor to the governor are seeking a way to lower taxes.

Unfortunately, like most political fixes, it’s weak tea.  They are all exploring lowering the taxation rate while none have spoken out to eliminate non-disclosure and install a level playing field.

The reason is simple.  The wealthy, who donate and have political influence, don’t want it.  They want to buy their $5 million house that’s only assessed at $1.8 million. What they fail to understand is that like everyone else, if DCAD had accurate information, their rate would decrease and their actual taxes paid might not change much.

Proof?  Here are the 10 most expensive houses currently for sale in Dallas with their asking price and DCAD valuations.  Will these homes sell for these prices?  Unlikely, but they’ll sell a lot closer to asking than assessed value.  But it does demonstrate what the owner and their Realtor believe they’re worth (armed with accurate MLS sales data) versus what they’ve paid their tax consultant to convince DCAD (who doesn’t have access to the same data).

Address Assessed Value Asking Price
10711 Strait Lane $18,200.000 $32,347,000
5950 Deloache Ave $18,340,290 $28,500,000
10210 Strait Lane $12,903,810 $27,500,000
10620 Strait Lane $8,298,160 $17,900,000
4009 W. Lawther Dr. $13,264,530 $17,500,000
10777 Strait Lane $8,616,100 $15,000,000
4800 Park Lane $9,893,530 $14,500,000
4926 Deloache Ave. $5,582,640 $13,645,000
5020 Elm Hollow Dr. $7,928,830 $11,950,000
4842 Brookview Dr. $4,623,020 $11,595,000

In the end, if a homestead is $100,000 off in assessed value, it’s theoretically $2,300 off in its taxes, but for every $1 million off, it’s $23,000 in tax avoided.  Just these top 10 homes represent over $82 million in discrepancy and are in theory avoiding some $1,904,080.07 in taxes a year. Oh, and nine of the 10 list tax agents on their DCAD records whose job it is to reduce property tax bills.

The more costly the property, the more incentive to finagle the assessed value. (And isn’t there something a little fishy when a homeowner on one hand lists a home for sale at a price vastly more than they’re paying a tax consultant to plead with DCAD that its “worth” with the other? Jus’ sayin’.)

But as I say, with all cards on the table, the math is more accurate and ultimately has less negative impact on ALL homeowners.  As it is, when you have garbage data going into a calculation, your end result is also garbage.

Me?  Over the past three years, my assessed value has gone up 35 percent and my taxes have been capped for the past two … meaning they wanted to raise me more but were limited by the 10 percent cap on homesteads.  So, like many of you, this more than just an academic exercise for me.

 

Remember:  High-rises, HOAs and renovation are my beat. But I also appreciate modern and historical architecture balanced against the YIMBY movement.  If you’re interested in hosting a Candysdirt.com Staff Meeting event, I’m your guy. In 2016 and 2017, the National Association of Real Estate Editors has recognized my writing with two Bronze (2016, 2017) and two Silver (2016, 2017) awards.  Have a story to tell or a marriage proposal to make?  Shoot me an email sharewithjon@candysdirt.com.

5 Comment

  • Mr. Anderson,

    I actually agree that disclosure is appropriate, but one sentence of your article rubs me the wrong way. In short, you say the rich need to pay their fair share. What is their fair share? My property taxes are almost 40k. I don’t utilize the schools, have never been to parkland, etc. I would venture to say that I pay my share along with about 9 other people’s share.

    Also, there is a system in place that DCAD can litigate with the homeowners. DCAD provides their counsel a budget of approximately 1 million to handle all cases. If DCAD had half of brain, they would litigate these cases and collect the extra taxes plus their attorney fees. In the example above on the 10 properties, if DCAD won, the extra money earned would more than cover the attorney fees. I would venture to say that if DCAD raised its legal budget to 5 million, it would generate far more than 5 million in extra attorney fees. Plus, the publicity may inspire the wealthy to avoid the litigation fight.

    • mm

      Thanks for the comment.
      .
      The easy answer is that your fair share is the going tax rate multiplied by an accurate appraisal of your property’s market value. You seem to imply that payment should be capped at some point…and that’s not correct.
      .
      Another way, fair share is when your home is appraised as accurately as those of lesser means. I guarantee that were I to choose 10 middle- or lower-cost properties currently for sale and compared their appraised value versus their selling price, the ratios (not dollar amounts) would be a whole lot tighter than the 10 expensive homes I compared. That’s not fair. If DCAD is to be inaccurate, it needs to be equally inaccurate. It’s not.
      .
      Absolutely the wealthy pay more. Absolutely the wealthy pay for more municipal services than they use. But everyone does because that’s the compact we have as a society. We all contribute to the common good regardless of whether we personally use it.
      .
      Like you, I have never sent a child to school nor had to utilize healthcare not covered by insurance. Does that mean I don’t have to contribute to those things? No. It means we should all be happy to contribute to smarter children and healthier people. They make society better/stronger overall.
      .
      The wealthy pay more taxes because first, they are able and second because their wealth (at some point) was derived from the society and its infrastructure which enabled them to accumulate their wealth. The wealthy derived more from the system. If you made your money from gas stations, it was only generated because the infrastructure of roadways enabled driving coupled with a citizenry able to afford cars. Try selling gas in Venice where there are no cars.
      .
      In the series I mention Pew Research’s findings on our changing opinions on taxes. Basically, as greed overtook the public consciousness and civic duty evaporated, our historically low tax rates are today viewed as being more unfair than when tax rates were much higher.
      .
      While I agree that property tax bills look large for everyone (because even if your bill is for $1,000, it represents a large chunk of your income). Without an income tax, property tax is the big revenue lever Texas pulls. What would your total tax bill look like if your property tax bill were halved but you also paid 3% in state income tax?
      .
      As I wrote, property tax is viewed as a fair tax (more fair than income taxes). Those who can afford more, buy more expensive properties. Those with less means own lower-priced homes. Done right, it’s a straight system that’s equally applied (without loopholes). But I must say that in your income bracket, while paying $40,000 in taxes may annoy you, it doesn’t change how you live your life. I doubt the same can be said in lower income brackets where household spending is shifted to afford their tax payments. Certainly the $6,000 I pay impacts my spending elsewhere.
      .
      And yes, I agree that DCAD doesn’t push their advantage in taxation enough…in residential and commercial.

      • I think that you misinterpreted my comments. I am ok paying more in taxes than the average person. However, I don’t want to be demonized by people and criticized that I don’t pay my fair share. The rich should pay more. I have never heard a rich person argue otherwise. The questions is which system is best and to make sure that people are not demonized in the process.

        Further, you make assumptions that my 40k in property taxes does not impact my lifestyle. It absolutely impacts my lifestyle. Without it, or if my taxes were the median in Dallas, I could afford to help more of my family members pay for college, give more to my kids’ school, have more than 10 days in vacation every year, have a second home, etc.

        Finally, I dispute your statement that property taxes, especially city property taxes, are a “fair” tax. Property taxes tax land ownership, but do not tax wealth. I grew up poor, have a high income now, but I am not wealthy. Yet, I pay far more in taxes than wealthy people. Moreover, my neighbor has a multi-million dollar “gentleman’s ranch” 3 hours away. He pays only a few thousand dollars a year in property taxes because he takes an ag exemption. Lets be clear- this doctor is no where near a farmer, but leases out his land for a few cows to save tens of thousands in property taxes.

        Some countries have a VAT, other countries have high estate taxes, different countries tax income at very high rates, and in Texas we have property taxes, income taxes and variety of other taxes. No system is perfect.

        • I did misinterpret your comments. Sorry. And you’re right, no system is completely fair.
          .
          I’m not the one who described property tax as a good tax, it’s researchers who study the impacts of taxation who say that in comparison to other taxes, property tax is considered a “good” tax because there are few loopholes.
          .
          Your ranch friend is cheating the system and apparently the taxing body in the area isn’t too picky on that.
          .
          If $40k impacts your lifestyle, it’s your choice to downsize. I could afford more if I really wanted to, but I don’t, in part because of the tax burden (in larger part because I don’t really need more).
          .
          My point is that disclosure would make the system more fair and ultimately result in lower property tax rates while assessed values would be more realistic. A situation that would help more than hurt.

  • The nondisclosure standard is necessary to protect the mortgage interest deduction, which is the bread and butter of the real estate industry. The high-end home owner pays less relatively speaking not so much because the system is biased toward the wealthy as because fair tax assessments at the high end would more clearly expose the deduction as the special interest manipulation that it is.
    If mr. frisbeen pays $40,000 in property taxes and is not wealthy, he must have a large mortgage on his property. If full price disclosure were in effect, he would have to deal with issues raised by the reality that the same tax preference that supposedly increases the market value of his home would also raise the amount of property tax that he would owe.
    Given the current historically low interest rates and related high property prices, we are probably at the closest that we will ever be to a tax wash to the new high-end home buyer from elimination of the deduction. This is why the industry will fight like hell to preserve nondisclosure.
    Also, I may differ with the author on the deductibility of property taxes. I do not know the particulars of the current rules but believe they actually include deductibility of property taxes paid on second homes.
    To the extent property taxes are deductible by someone like mr. frisbeen, this is just another manipulation to
    support and protect the greater manipulation represented by the mortgage interest deduction.