Texas Property Taxes - Why Do We Have Them, and How Do They Work?
As Texas property taxes have risen in recent years, many homeowners have complained that their tax burden is unfair and unnecessary.
The Texas state legislature has passed several laws in recent years helping to ease citizens' property tax burden, but tax bills are still high. For example, I have a rental property in Arlington for which I have just received my 2024 property tax bill. It is a 2,000 square foot home that has been appraised at $352,000. Since this is an investment property, I don't get any exemptions. My tax bill this year for this property is $7,693!
As high as this bill is, what would actually happen if the state of Texas got rid of property taxes? Why do we have them in the first place? And, for that matter, how do they even work?
Why Do We Have Property Taxes in Texas?
Let's start with the fundamental question of why Texas even has property taxes. In short, property taxes are the primary funding source for many government entities in the state.
Texas does not have a state income tax, so the various jurisdictions have to obtain their funding from other sources. Most of the state level entities (such as the state government and its various agencies) get their funding from sales taxes. Currently, the statewide base sales tax rate is 6.25%. This means that every time there is a taxable sale anywhere in the state, the state receives 6.25% of the amount, and that 6.25% goes to fund the state's needs.
As you are probably aware, the sales tax rate in most places is at least 8%, so you may be wondering where the remaining sales tax goes. The answer is that it goes to the city in which the sale is made and possibly also to a second or third taxing unit as well.
Currently, state law allows cities to impose an additional 2% sales tax, so the maximum allowable sales tax rate in the state is 8.25%. In Arlington, where I live, the sales tax rate is 8.25%. So, when I go to Wal-Mart and buy $10 worth of taxable goods, I pay $10 to Wal-Mart, $0.625 to the state, and $0.20 to the city of Arlington.
Back to the original question: Why do we have property tax? If the city gets funding from sales tax, shouldn't that be enough to cover their spending needs? The short answer is no.
Most city funding comes from property taxes, as does local school district funding, community college funding, county funding, and local county hospital funding. Other local units may also receive funding from property taxes. For example, if there is a Public Improvement District (PID) where a property is located, that PID will receive some of the property tax revenue from the property.
One other important item to note: Texas does not have a state-wide property tax. Only local taxing units receive funding from property taxes.
What Happens if We Eliminate Property Taxes?
Naturally, it would be nice if we didn't have to pay any kind of taxes at all - property tax, income tax, or sales tax. The reality is, our government entities have to attain funding somehow. We could eliminate the property tax, but then we would most likely have to implement a state income tax to make up the difference. Alternatively, we could raise the sales tax rate.
According to the Texas Taxpayers and Research Association, replacing current property tax funds with increased sales tax funds would require raising the sales tax rate to 19.27%! This has two main disadvantages.
- Sales taxes are susceptible to wider swings in economic conditions - During economic downturns, people tend to buy fewer taxable items. This means that during recessions, state revenues would decline. On the other hand, recessions don't tend to affect property values very much. In short, property taxes are a more consistent way for the government entities to derive funding.
- Sales taxes impact lower and middle-income earners disproportionately - Lower income earners must spend a greater percentage of their income on taxable items. As a result, sales taxes tend to have a more negative impact on them than on higher wage earners.
Implementing a state income tax would have a similar disproportionate impact on low and middle-income earners for much the same reason that sales taxes impact them more. While eliminating property taxes may sound good on the surface (especially to those of us who own multiple properties), doing so has its disadvantages. The truth is, property taxes are probably the best tasting poison available to us.
According to a study done by the Texas Tribune, if Texas were to eliminate property taxes, the state would have to find a way to raise roughly $81.5 billion each year! That's more than half of the current budget for the state. Obviously, immediately eliminating property taxes is not feasible.
How Texas Property Taxes Work
Since all of us who own property in Texas have to pay property taxes, it's important to understand just how it all works. To start, there are several parties involved in the property tax system in Texas.
- Taxing Units - These are the entities that receive funds from property taxes. As I've already mentioned, cities, counties, county hospitals, school districts, and community colleges all receive funding from property taxes. In addition to these, there are various other entities that may receive funding as well, depending on where a person lives. Each taxing unit sets its own tax rate, which is a dollar amount that gets multiplied by a property's value to arrive at an amount that that entity will receive from a given property.
- Appraisal Districts - These are the organizations (usually one per county) that set the property values by which the tax rates get multiplied.
- Tax Assessor-Collector - Each county in Texas has its own tax assessor-collector who is actually responsible for collecting property taxes. They take the appraisal provided by the Appraisal District and calculate how much each property owner owes based on the various taxing unit rates and the appraised value of the property.
- State Comptroller - The comptroller's office basically monitors the property tax system. They don't actually collect any taxes or have anything to do with the appraisals, and they have no jurisdiction if there is a legal complaint. They simply act as technical assistants.
Each January, the Appraisal Districts begin their process of appraising property values. They will generally send an appraisal notice to each property owner in mid to late-spring. Once an owner receives the appraisal notice, they have the right to protest their property valuation if they believe it is incorrect. Each Appraisal District handles protests slightly differently, but in general, property owners can start with a quick online protest. If the Appraisal District doesn't agree with the suggested value that the owner proposes, the owner then has the opportunity to appear before an Appraisal Reveiw Board to argue their case.
Once appraisals are finalized, the various taxing units will set their rates - usually in late summer. This is the other opportunity that property owners have to influence their property tax bill. Owners can attend city council meetings and school board meetings, etc. and talk with members of these taxing units if they are unhappy with the rates.
After the rates are set, the county Tax Assessor-Collector will send out tax bills to all property owners. This generally takes place in the fall. Technically, the tax bills are due upon receipt. However, penalties and fees will not be assessed as long as the property taxes are paid in full by the end of the following January.
Conclusion
Property taxes are a way of life for Texans. While, on the one hand, it would be nice to eliminate them entirely, on the other hand they provide necessary funding for most basic services that we tend to take for granted in the state. If we truly want to get rid of property taxes, we must take a hard look at what we are willing to sacrifice.
The lion's share of property tax goes to schools. The public school system would be hurt tremendously if we didn't have property taxes. Arguably, we might be able to pare back spending at the city and county levels, but we still have to pay for things police and fire protection. No matter how you look at it, the funding for these fundamental services has to come from somewhere. If not property taxes, there would have to be some other funding source, and we would still end up paying through that source.
If you are a property owner in Texas, there are things you can do to ensure you are paying your share and no more. For example, each county offers various exemptions (such as the homestead exemption) that limit the amount which an owner can be assessed. Also, you can always enlist the help of a real estate agent in protesting your taxes. There are various companies that will protest for you, but beware, some of these companies will charge you quit a bit to do so.
For more information about property taxes, check out the following resources: