Monday, November 2, 2015

Texas Homestead Exemption for School District Property Taxes Amendment, Proposition 1

This is part of the series of posts where I struggle to understand and think through the 7 proposed amendments to the Texas Constitution that we can vote on 11/3.

Ballot Title


The constitutional amendment increasing the amount of the residence homestead exemption from ad valorem taxation for public school purposes from $15,000 to $25,000, providing for a reduction of the limitation on the total amount of ad valorem taxes that may be imposed for those purposes on the homestead of an elderly or disabled person to reflect the increased exemption amount, authorizing the legislature to prohibit a political subdivision that has adopted an optional residence homestead exemption from ad valorem taxation from reducing the amount of or repealing the exemption, and prohibiting the enactment of a law that imposes a transfer tax on a transaction that conveys fee simple title to real property.

Helpful Links

What does this do?


There's basically 3 parts: 1. increase in homestead exemption, 2. increase in extra exemption for the elderly/disabled, and 3. banning of sales tax on home sales. You can ignore 2 because it basically just keeps things the same with regard to an extra amount of homestead exemption for elderly/disabled. Same with 3; we already don't collect sales tax on home sales, and doing so would require its own constitutional amendment. So mostly, to decide whether to support this change, we just need to understand part 1.

This change applies to the property taxes collected by your local school district. Basically, every year you pay a percent of your property's value to the school after the amount of the homestead exemption, which is currently $15,000. As a simple example, pretend you own a $35,000 home, and your school district has a property tax of 5%. You'd have to pay 0.05 * (35,000 - 15,000) = $1,000. With this amendment, the exemption would change such that you'd have to pay 0.05 * (35,000 - 25,000) = $500. Since homes are generally much more expensive than this, the actual tax cut will be much smaller than these simple examples.

One weird thing is that this is a cut in local taxes being mandated by the state government. What will the school districts do about the lost revenue? The state government will cover the cost with its own taxes. Now you might start to see why, even though this is described as a tax cut, the Libertarian Party opposes this amendment. The House originally wanted to cut the state sales tax, but the Senate wanted to make this change instead, and we ended up with the Senate's proposal. So from state and local taxes combined, this isn't necessarily cutting taxes, since the cut in the local level is made up by increased spending at the state level which was originally supposed to be a cut at the state level. Also, as property values go up, property tax rates can always be "cut" without losing revenue, and it's quite possible that many local governments will choose to delay inevitable property tax cuts to offset the forced exemption increase from the state government. And there's some entertaining irony for state politicians who strongly oppose the federal government meddling in state affairs to be meddling in local government affairs.

Another weird thing about this is that state gas taxes will be used to cover part of the new increased state spending on local school districts. Why is that weird? Because prop 7 is about looking for more ways to fund our highways since the gas tax isn't raising enough money for our roads. So why are they, in this amendment, wanting to divert more of the gas tax revenue to other things? I don't get it.

Why would this be good?


It cuts property taxes a little, even though it's arguably at the expense of a state-wide sales tax cut. Also, I suspect that it's good for the state to take a larger share of school funding at the margin, because it can help smooth out funding across schools rather than rich areas having a lot of school funding while poor areas have a little. However, I don't know that this is what the state will actually do; this is a potential improvement.

Why would this be bad?


I think homestead exemptions distort the market and should be eliminated rather than increased. I'd prefer a sales tax cut. And I'd prefer any property tax cuts to come in the form of rate decreases, not exemption increases. First, you pay the property tax regardless of whether you own or rent. Property taxes must be paid on apartments, for instance, and all of an apartment's money comes from rents, so it is therefore reflected in the price of rents. But homestead exemptions only reduce property taxes for home owners, which effectively is a state subsidy of home ownership versus renting. Not only that, it is on top of additional federal subsidies to home ownership (like the mortgage interest deduction). I don't want to further distort the free market's pricing of buying-versus-renting property, especially since this disproportionately benefits the wealthy (who are more likely to own than rent). Also, you may have recent memories of serious economic problems that were arguably caused by a distorted market that over-encouraged home-buying...

Verdict


I plan on voting no. Because I'm more confident in the cons of expanded homestead exemptions (as opposed to the originally proposed across-the-board tax cuts) than I am confident in pros of the changes in education funding.

What would it take to change my mind?


I'm not sure. But this was a pretty confusing amendment to learn about, so there is much more likely to be some "unknown unknowns" that I could still discover that would change my mind in ways I can't anticipate.

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