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.

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Why Property Taxes are so BAD

Why Property Taxes are so BAD

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 is 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?”

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