By Bill Oakey
September 10, 2013
You have probably heard the news by now. The Austin City Council “held the line” and did not raise the property tax rate for the new City Budget. Unfortunately, this is one of the worst examples of public deception and lack of transparency that we have in our city. The entire process needs to be reformed from top to bottom. But for now, let’s keep it simple and focus on the tax rate issue.
On Tuesday, Sept. 10th the City Council gave each other high fives and whooped up a storm because they “did not raise the tax rate this year.” Mayor Lee Leffingwell deserves some credit for insisting that they not increase the rate and make things even worse. But what they gave us is a 3.8% tax increase.
Now let me explain how that happened.
Each year the City publishes a number called the “effective tax rate.” That is the rate that would generate the same amount of revenue as last year. This year, because overall property values increased, the effective tax rate went down. That figure for this year’s budget cycle is 48.43 cents. The City would have to adopt that rate in order to balance the budget with a zero tax increase. The 50.27 cent rate that they did adopt equates to a 3.8% tax increase for the average appraised homeowner.
In some neighborhoods, the tax appraisals went up so much that homes are subject to the annual 10% cap on tax increases. So, people in that situation will see their City taxes go way up. City officials have no way of announcing what the tax impact will be on everybody. But they could certainly be a lot more transparent and a lot less deceptive. Because of fluctuations in property values from one year to the next, it is silly to even think about comparing last year’s adopted tax rate to this year’s. The effective rate is the one that matters.
Regardless of whether overall property values have gone up, gone down, or stayed the same, the effective tax rate will result in a zero tax increase for the average value home. That’s the whole reason such a rate was created in the first place. Cities use it as the starting number to make sure they do not exceed the maximum tax rate allowed by State law.
So, we need to reform the City of Austin’s budget process. We should require them to publicize any increase above the effective tax rate that they are considering for the new budget. That approach is sometimes called zero-based budgeting. It’s a method that would tell us what any increase in spending would actually do to our taxes. If the City had based all of their negotiations around the effective rate of 48.43 cents, we would have had a fair and honest budget debate.
But here’s what really happened. City budget staff recently announced that they had $13 million more than anticipated because of increases in construction fees and sales tax collections. So, the City Council applied $7 million of that surplus towards reducing the tax rate down to 50.27 cents, 2/100 of a cent below last year’s rate of 50.29. Then, voila! They suddenly had $6 million in happy-go-lucky “leftover” money that they could spend! Which of course, they did. Then came the high fives, the whooping and all the rest. All because last year’s totally meaningless tax rate was touted, instead of the fair and honest effective tax rate.
So, grab your partner, hold hands and get ready for a new kind of dance. Next year we are going to reform the City Budget process! And if we’re really lucky, we might be able to slip in one other reform. How about requiring them to hold the public hearings that are published and advertised as “starting at 4:00 PM” to actually start somewhere near that time? I stayed at home on the couch for the last one, because it started 6 hours and 39 minutes late. Like they always do.
Note 1: For a City chart that shows the increase in property values and the effective tax rate, see Page 17 of the Proposed Budget: www.austintexas.gov/edims/document.cfm?id=193732
Note 2: In 1987 I presented a proposal to the Texas Legislature, which resulted in the revised truth-in-taxation law that local governments use to publicize notices of proposed tax increases.