How Real Estate Taxes Can (And Will) Shape A City: Pt. 1 (From “The Live Musical Capital” Lens 🎸🦇)
Guess what time it is?? It’s your favorite time of the year again, TAX TIME!
“Wait, what? I already filed my tax return, and they’re already asking for more?! Can I live?! 😭”
Well, there’s a different type of tax being decided in the background, and it’s somewhat of a quiet, immovable force that can have a major impact on how a city looks, feels, and sounds, and can be sourced right to your front door.
Zooming out to paint the picture together, one of the early lessons about US history tells the tale of their grievances with Great Britain and its control and power on the early colonies, leading to the concept of “no taxation without representation,” where the American colonists felt that they had no say in a distant government that was extracting from their economy without providing representation nor vote in the government, and thus was unconstitutional. Of course, we all know this was a core principle during the American Revolution, and that there was a long period during the first 124 years of the United States where it had no federal income tax.
Fast forward 250 years and we have quite the menu of tax types, that serve as the primary revenue source for the federal and state governments, including but not limited to:
Income tax, such as federal, state, and local (municipal) taxes on income. This can be earned income, such as salaries and wages or self-employment income, or investment income, such as interest, dividends, and capital gains.
Sales & use tax on goods & services, with the typical requirement falling on businesses to assess, collect, and remit that tax from their consumers.
Transfer tax on the transfer of assets, such as the gift and estate tax – the US federal government has a system where those two interact, and several states have their own separate system, while others have none.
Property tax on the value of tangible assets, such as real estate and personal property. This is the focus of this article, as it’s a form of tax that has the potential to influence how cities and communities look and change over time.
Zooming in a bit to look at the state level, we’ll use Texas as our example. Texas does not have a state income tax on individuals (it does impose a type of income tax on certain business entities, known as its Franchise tax), however it does collect its revenue from a menu of consumption-driven taxes, such as sales and use tax, taxes on specific goods such as vehicle vehicles, alcohol, tobacco, and a varied menu of excise taxes (a type of indirect tax charged on specific goods, services, and activities.)
Zooming in even further: because Texas doesn’t collect state income tax, it defers the primary responsibility for assessing and collecting the revenue necessary to help fund the public school system to its many municipalities, primarily cities and counties. One of the primary methods for those municipalities to assess and collect revenue for their operation comes from – you guessed it – property taxes, or specifically taxes imposed on real and personal property within their boundaries.
Thus, we tend to see a relatively higher average rate of tax on real estate and personal property in Texas compared to the national average in the US – approximately 1.4% on average (according to Tax Foundation) compared to the US average of 0.89%, and the total rate often ranges between 1.8% and 2.2% in major metropolitan areas, such as Austin, Dallas, and Houston.
Zooming in that list bit to the greater Austin area, specifically: depending on where you live within the metro area / city boundaries (and within which county – typically Travis, Williamson, or Hays for Austin residents) those taxes are being remitted to a pretty standard menu of entities/jurisdictions – they can vary depending on exactly where you live, so I’m just listing the high level categories and some (but not all) examples here (please don’t be offended if your jurisdiction’s not included here 😄).
The City:
City of Austin
City of Round Rock
City of Pflugerville
City of Leander
City of Cedar Park
The County:
Travis County
Williamson County
Hays County
The School District:
Austin ISD
Round Rock ISD
Pflugerville ISD
Leander ISD
Eanes ISD
Lake Travis ISD
Del Valle ISD
Manor ISD
Hays ISD
Community College District
Austin Community College
Special Purpose Districts:
Travis County Healthcare District (aka Central Health)
Travis County Emergency Service Districts (ESDs)
Municipal Utility Districts (MUDs)
Public Improvement Districts (PIDs)
Every year, these various taxing jurisdictions create and approve their budgets, often on a government fiscal year that differs from the calendar year (such as October through September for the City of Austin, and July through June for Austin ISD.)
Depending on their fiscal year start, their budgets are being crafted in the months leading up and approved by the governing body, such as a city council or board of trustees. Once they’ve approved their budgets, they will then coordinate to set a proposed tax rate based on the estimated total market values of the real/personal property within their jurisdiction and how much revenue that would bring in to meet their budget needs.
There’s a lot of nuance here, as there some rules governing how much the rates can change year over year (in general), and a threshold for whether or not the rate change requires voter approval. It’s created an interesting back and forth that forces the taxing jurisdictions to cautiously approach these rate adjustments based on public perception and a variety of factors, including:
How much did the aggregate fair market values of all real and personal property increase or decrease year over year?
How much of that value is made up from residential property versus commercial property?
How much did exemption amounts change?
How much did their budgets change due to factors such as:
Inflation (everyone’s favorite scapegoat)
Growth/Decline of Departments and Staff
Increase/Decrease in Major Contracts (e.g. law enforcement, emergency services)
Special Projects (e.g. major infrastructure projects)
These are just a few of the lines of thought involved in putting together these numbers. A common analogy would be to consider a pie, representing the value of all property within the taxable base, and every year the size of that pie changing – typically increasing, but sometimes decreasing – while the taxing jurisdictions are holding a knife to cut their slice (the rate) that’s also increasing/decreasing depending on all of the above factors. You could say that the elected officials are sitting at the head of the table to cut these slices, while the property owners watch anxiously to see how much big or small that slice is when compared to previous years, and there’s a whole LOT of judgment and opinion at this table – some informed, much of it not (sounds like Thanksgiving, huh?! 🍴)
This article was written as a part 1 intentionally, to leave some space to dig in even further and use some real life examples to explore how these factors show up in the way homes, businesses, restaurants, venues, and many more are affected and evolve based on those yearly changes – such as your favorite business closing down, neighbor moving away, or an entire neighborhood changing rapidly. Keep an eye out for part 2 in a future newsletter as we zoom in even further to discover and discuss the story within the numbers (“Wait, are taxes interesting now?!” 🤓)