Our property tax system is rigged
Photo by Steven Martin
If Texas is booming — and it is — then why do the taxes on my home keep going up while funding for roads and schools keeps getting cut? One of the culprits is a property tax system that is shot through with loopholes and rigged against homeowners.
The property tax appraisal system’s bias against homeowners (including me) is costing Texans $4 billion a year, according to a calculation made in 2006 by the state’s largest appraisal districts. But the money might not be the worst of it. Texas homeowners are realizing that the appraisal system is highly politicized, and they’re beginning to suspect that our economic boom is primarily benefiting well-connected insiders.
The good news is that three simple solutions — tightening the definition of “comparable property,” mandating price disclosure on commercial property, and requiring each side in an appeal to pay its own attorney’s fees — will go a long way toward fixing the way our state does business.
The state comptroller should provide the leadership needed to address these concerns and, if necessary, reform Texas’ property tax division to do so.
Property owners have the right to compare the appraised value of their property to that of other “comparable” properties if they believe their appraisal is too high. While this is an important safeguard, the courts have only loosely defined what is considered comparable. Tightening the definition of comparable property (to consider age, location, tenants, utility costs, etc.) would codify what is a well-established practice in the corporate world, where using the known value of comparable properties to defend an estimate is standard practice. But ask any CFO — and I used to be one — and you’ll hear that if you rig the estimation by selecting properties for comparison purposes that aren’t, in fact, comparable, you invite trouble with your auditor, with investors, with the Securities and Exchange Commission, and possible loss of employment. Rigor in identifying truly comparable properties when estimating value is fundamental to reliable accounting. It’s remarkable that Texas courts don’t demand it. The law should be changed so that appellants are required to identify comparable properties with the same rigor used in the corporate world.
Texas is one of four states that do not require disclosure of prices upon the sale of a property. Requiring this for commercial properties will address an asymmetry between residential and commercial property valuations that contributes to unfair treatment. For residential properties, determining prices for comparable transactions is possible thanks to the internet and multiple listing services. No such price discovery process exists for commercial properties. The resulting asymmetry is this: Residential property values are highly reliable and thus offer little scope for appeal, while commercial property valuations are highly unreliable and offer much opportunity for appeal. Fixing this imbalance by mandating price disclosure of commercial properties will remove one of the opportunities available to commercial property owners — many of whom do not even live in Texas — to exploit unfairness in the system.
Finally, each side of a property appraisal appeal should pay its own legal fees, regardless of the outcome. Appellants stand to gain a large tax reduction if an appeal is successful, meaning they can risk big legal fees. In contrast, because appraisal districts are merely administrative intermediaries, they don’t enjoy an economic windfall if they succeed and thus hesitate to risk large legal fees. Too often, they must settle low rather than settle fair. In business, we know that if negotiators confront a disparity in economic motivation like this, a fair outcome is almost never expected. Limiting legal fee exposure to self-incurred fees will improve the balance in this equation.
Mandating too much rigor in the appeal process might overwhelm small and mid-size businesses, something we must be careful to avoid. But for very large properties, these adjustments will begin to fix the property tax appraisal system while leaving in place the mechanism available to all property owners to protect themselves from an overzealous (or incompetent) appraiser.
The job is hard, but if we lose the confidence of Texas taxpayers, we will have lost a lot more than money. Paying taxes is an affirmation of faith in Texas, and we cannot afford to lose that.
