April 12, 2022
I thought this was an appropriate topic given the recent release of property taxes for 2022. Let’s take a closer look at understanding property taxes in Texas.
Property taxes provide the largest source of income for local government programs and services. Property taxes are ad valorem taxes meaning they are levied according to the value of a person’s property. The more valuable the property, the higher the tax. Determining the amount of tax a person has to pay on their property involves 3 steps: 1) the local government determines the annual budget 2) all taxable property is appraised 3) the budget is then allocated among all property owners.
When determining the revenue needed to cover costs, each taxing authority prepares their own budget. These taxing authorities include: State of Texas, counties, cities, towns, villages, school districts, utility districts, water districts, hospital districts etc. After the budgets have been prepared, then sources of revenue (sales tax, income tax, licenses etc.) are subtracted from the budgets and the left-over balance must come from property taxes.
Next, the value of the taxable property within each taxing authority’s district must be determined. This is where the appraisal district within each county appraises each taxable parcel of land along with any improvement on that land. The appraised value is the estimated fair market cash value of the property. The appraised value is converted to an assessed value and added together with all the other values for the taxable property within that district.
The tax rate is then determined by dividing the taxing authorities’ budget by the total value of the taxable property. For example, let’s say MISD has a budget of $1,000,000. The value of taxable property within the district is $20,000,000. ($1M/$20M = 5% or $5 per $100 of value). In Texas the tax levy is expressed as dollars per hundred.
Once each taxing authority has calculated its rate, this is then applied to each property within its district. Thus, taking the rate and multiplying it into the assessed value of a property gives you the tax that is due from that property owner for that parcel to cover the budget for the taxing authorities.
The recent massive increase for assessed values that owners in Montgomery County have seen, some over 500%, has caused people to reassess the fairness of the property tax system and how appraisals are conducted. Many owners of commercial property are livid, as the increases obliterate their cashflow. Leaving many questioning how they will survive without drastically increasing the rates and prices they charge tenants and customers.
Immediate property tax reform is needed for commercial property owners. This could be seen in caps on not only the rate but on the assessed value, perhaps using a percentage of value instead of the full amount, and/or increasing the amount of revenue collected from sales tax or other sources.
Taxing on property valuation is similar to taxing an individual on unrealized gains from their stock portfolio. An owner is being taxed on the equity gain in their property, yet that is not cash in their bank account they can utilize to cover the tax that will be levied.
Jacobus, C. J. (2014). Texas Real Estate 12th Edition. On Course Learning.
Checkout some of our other contact:
- Blog: https://crdrealty.com/biden-tax-proposals-and-commercial-real-estate/
- Blog: https://crdrealty.com/10-year-texas-self-storage-update/
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