Reforming property taxes due to COVID-19’s new reality

Coronavirus & Property Taxes

The novel coronavirus has upended Texans’ lives and the state’s economy. We do not yet know what “normal” life will look like when this public health emergency has finally passed, but – more than ever – our cities, counties, and school districts will need adequate and equitable revenue sources to support the public services needed for recovery.

Our local governments rely heavily on the property tax to support public services. In the world after COVID-19, we will need the most accurate and equitable way to allocate the responsibility for paying property taxes.

Sales price disclosure

Our post-pandemic lives may have radically different work and living arrangements than we had before March 2020. If working from home becomes a standard practice for many Texans, downtown office towers may become obsolete, or at least less desirable and therefore less valuable. Similarly, workers may be reluctant to travel in crowded public transportation or may not even need to commute at all. These changes in commercial and residential patterns could result in a radical reshuffling in the attractiveness and value of real estate.

Property taxes are based on the value of each property. To ensure that property owners are paying their fair share of taxes, based on accurate valuation of their property, Texas lawmakers must reform our appraisal process to accurately determine the new values of the new real estate market.

The taxable value of each piece of property in Texas is determined by the appraisal district in each county. These districts are governed by a board of directors appointed by the various local governments that levy property taxes in each county – the county, cities, school districts, and special districts such as community colleges. The local governments fund the district’s budget in proportion to the amount of total property taxes each local government levies. The board hires a chief appraiser, who commands a trained staff that appraises the value of all property in the county. Each appraisal is intended to reflect the “market value” of the property – what that property would sell for in a competitive market.

In most states, the appraisal process is based on “sales price disclosure,” a requirement that the price at which any property changes hands is publicly reported. This information is the best basis for determining the true market value of a property. Then, based on this information, the current value of similar properties can be determined, with appropriate adjustments for differences in age, condition, location, and other factors. 

Unlike a majority of other states in the nation, Texas is one of a dozen states that does not require buyers or sellers to report sales price information to local authorities. Texas appraisal districts therefore lack the most complete and accurate basis for determining property values. This is like making a store clerk guess the correct sales tax on an item, while you cover up the bar code and hide the price.

The result is that difficult-to-assess commercial properties and high-end homes tend to be undervalued. Owners of these properties thus pay less than their fair share in taxes that support public services, which then shifts the financial burden onto less well-off homeowners. Requiring reporting of all real estate transactions will be essential in correcting this imbalance and recognizing the changed values of property.

A recent national study concluded that Black and Hispanic homeowners face tax appraisals that are 10 to 13 percent higher than for similar White-owned property. Local neighborhood-level characteristics that affect market value are inadequately reflected in appraisals. And even within a neighborhood, there are differences in the likelihood of people of color to appeal their appraisal, to succeed in that appeal or to get reductions similar to those granted White property owners.

An argument made in the past against sales price disclosure was that public knowledge of sales would inevitably lead to taxation of real estate transactions. But in 2015 the voters approved an amendment to the Texas Constitution (Article 8, section 29) that prohibits “a transfer tax on a transaction that conveys… title to real property,” eliminating this concern.

Opponents of providing appraisal districts with the sales information needed for accurate appraisals argue that, in some commercial transactions, the sales price does not reflect complicated financing arrangements, packaging of disparate properties, or tax-avoidance swaps of property. Appraisal districts are staffed with trained professionals who are able to make appropriate adjustments to the basic sales price or, when necessary, can hire outside experts who specialize in extreme cases such as complex industrial properties. But accurate reporting of the price at which property changes hands provides the foundation for an accurate appraisal.

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