Issue
Texas real estate is in demand, and the increase in value is what makes property in our state such a great investment.
In fact, the state’s homeownership rate reached an all-time high of 70% in September 2020, according to the Real Estate Center at Texas A&M University.1
However, some lawmakers in the past have sought to lower the current 10% appraisal cap rate to 3% or 5% under the guise of limiting the property tax bill of a residential homestead. Further lowering the artificial limit on the appraisal value of a home through a government overreach program sets a dangerous precedent.
Unfortunately, these proposals nearly guarantee an automatic annual increase in a property tax bill. Appraisal caps also shift the property tax burden of higher-valued properties to middleclass homes, which typically do not appreciate in value at the same rate as higher-priced homes.
What does this mean for the real estate industry?
Vilifying appraisal increases is dangerous rhetoric and can lead younger populations to shy away from homeownership. Value increases in real property are signs of a robust local and state economy and lead to greater building of wealth.
In fact, a 2018 Journal of Economic Perspectives article that focused on U.S. homeownership and financial benefits concluded that “… homeownership is a valuable institution. On average, it allows families to build wealth and serves as a measure of financial security.”2
Texas REALTORS® position
Texas REALTORS® opposes efforts to reduce the property-tax appraisal cap from its current level of 10%. We also oppose the imposition of an appraisal cap on commercial properties.
Legislative outlook
Expect legislation to be filed relating to lowering the appraisal cap for homestead properties. These bills may also try to extend the appraisal cap to all real property in Texas. These efforts are attempting to rein in increasing property tax bills, but legislators
should instead focus their attention on the process to collect property tax revenue at the local level.
Historical perspective
A limit on appraisals was enacted by the Texas Legislature in 1997 and was fully implemented for the 1998 property tax year. The cap on appraised values is currently applicable only to residential homesteads. Past legislatures have correctly turned away these types of ill-advised proposals guaranteeing an automatic increase in local property tax bills. While the political pressure to lower the appraisal cap percentage may be great, there are consequences. Appraisal caps do not address the underlying problem with our current property tax system and would merely limit the increase in value a residential homestead could experience. Lowering the property-appraisal cap also creates havoc within the appraisal system. A report from the Real Estate Center at Texas A&M University outlines the detrimental impacts various tax plans following this model would have on the Texas economy.3
According to the report, “[a] proposal to cap value increases at 5% per year similar to the California Proposition 13 model offers a promise of relief from climbing taxes, but the cure could produce undesirable side effects in the long run” and “… would work to distort housing purchase decisions by keeping property taxes low for long term residents.”4
The report’s conclusion found that the prospect of appraisal caps “threatens to impact the marketability of new homes and retard demand for new development by increasing the burden of purchasing new homes or even moving to another existing home.
As time passes that impediment would continue to grow into a sizable distortion of the housing market.”5
1 “Texas Housing Insight,” Real Estate Center at Texas A&M University, November 2020. http://assets.recenter.tamu.edu/Documents/Articles/2120.pdf
2 “Homeownership and the American Dream,” Journal of Economic Perspectives, Vol. 32, No. 1, Winter 2018. http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.32.1.31
3 “Property Taxes: The Bad, The Good, and The Ugly,” Real Estate Center at Texas A&M, 2013. http://assets.recenter.tamu.edu/documents/articles/2037.pdf
4 Ibid
5 Ibid