Recently on KETR, Hunt County Appraisal District Chief Appraiser Brent South and City of Commerce City Manager Howdy Lisenbee joined KETR staff to discuss the current status of the property appraisal process in Texas and in Hunt County. An edited transcript of the June 6, 2024, broadcast of KETR's North By Northeast follows.
Appraised values and tax rates, the one-two process
Mark Haslett: We have Brent South from the Hunt County Appraisal District in the studios with us, along with Commerce City Manager Howdy Lisenbee. And, of course, property appraisals are an emotional topic. They're a high-profile topic, and with all of the development, both residential and commercial out here, and it's a very big deal. Brent, you've been a guest on KETR before, welcome back. Good to have you in the studios with us again.
Brent South: Good morning, Mark. It's good to be here again. Thank you.
Haslett: Today, we plan to discuss some changes in the appraisal process that have come about as a result of the last session of the Texas legislature and just to provide a little context for folks who might have tuned out all things legislative recently, since they're not in session right now, the Texas legislature meets every other year. And they will return to Austin in January of 25, so this is an off year. All of the changes that were made by the previous legislative session, a few of them went into place immediately, but most of them went into effect at the beginning of September of this past year, of 23. So now we are living in the world created created by the most recent session of the legislature and there have been some changes. Changes to how much taxes can increase, changes to various exemptions and some changes likely to have a ripple effect in the school funding system. So let's get after it. Let's talk about what changed and what's going on with appraisals these days.
South: Yeah, absolutely. There were some significant changes from the legislature. As a matter of fact, it was such a challenge. It took them three special sessions to get it all done, but they finally ironed out the details and got a property tax relief bill passed and homeowners and property owners actually saw some reductions in their property taxes last year. Not everyone, not across the board, but the majority of homeowners with the homestead exemption saw their property taxes either stay the same or decrease.
And a big portion of that is because of Senate Bill 2, which was the property tax relief bill, and in Senate Bill 2, the legislature increased the homestead exemption from $45,000 to $100,000, and that's for your school property taxes. So the way that works, if you have a home, for example, that the market value is $300,000, for your school property tax calculation, If it is your homestead property, meaning it's your primary residence, you live there as of January 1, you get to take $100,000 off the top. So instead of being taxed at the $300,000 market value, the calculation is based off of $200,000. That's a significant change.
We also saw a situation over the last couple of years, the real estate market in Hunt County and in Northeast Texas in general has been extremely hot. And so the majority of homeowners were receiving the benefit of the 10 percent homestead cap. So you couple that homestead cap, meaning that the taxable value of your homestead property can only increase by 10 percent in one given year from one year to the next. The addition of the $100,000 homestead exemption and tax rate compression. A big part of Senate Bill 2 was additional rate compression for school districts.
And the concept behind that is that the state is trying to pick up more of the funding for public education. They're trying to get it back to about a 50/50 mix between local property taxes and state funding. It got a little bit out of whack there for a while. It was about 70/30. Seventy percent coming from local property taxpayers, thirty percent coming from the state. So they have been forcing this rate compression and the concern that I think school districts and that we all should have with the rate compression is that we had a large rainy day fund when they passed this bill, and a lot of that money from the state is coming out of surplus. And that's great when the state's going great, the economy is good, and there is a surplus. The question is, How long is that sustainable? How long will that surplus be there? And if and when the state can no longer afford that, what happens? Typically, what would have to happen is they would have to allow school districts to raise their rates again to make up the difference. So you just need to be cautious or mindful of the fact that, yes, while school tax rates have gone down significantly, there's no guarantee that they're going to remain at those lower rates.
Haslett: What is what is rate compression exactly? How does that work?
South: The school districts in the state of Texas when they set their tax rate, they know that they're going to get a certain amount of money from the state of Texas, and the remaining portion will come from local property taxes. So whenever they do their truth and taxation calculations, they take their total assessed value on the appraisal role. Less all exemptions, add in the state money. They come up with their tax rate. What the state has done, as I said, okay, we're going to pour in more money to local school districts so that you can lower your rate.
So rate compression is basically the state telling school districts, you must lower your local property tax rates. And we saw some pretty significant rate reduction over the last year. And so you couple that again with the homestead exemption, the 10 percent homestead cap, because school taxes is the biggest portion of your property tax bill. You do get taxed by the cities, the county, hospital district, any special districts that you might be in, but the largest portion of your property tax bill is for public education. So the state wanted to make sure that they address that issue so that property owners could actually see some real relief on their property tax bill.
Haslett: Has there been any talk that you're aware of, of somehow extricating school funding from property taxes? I understand that it would be making some huge changes in the way Texas does business. But it's something that could be done.
South: It could be. As a matter of fact, that's one of the interim charges of the legislature this year is to look at a mechanism to eliminate the M and O tax portion for school districts. That's the maintenance and operations. So a tax rate is a combination of M and O, maintenance and operations, and I and S, which is interest and sinking, basically debt. The debt has been voted on by the voters. Any time there's a bond and it passes, they create debt. So there's not a whole lot that can be done there until those debts are paid off. But on the M and O side, they're looking at, they're coming up with a report on what it would take to eliminate the M and O tax rate for school districts.
The problem is they would have to replace about 60 billion each year to do that. So where do you go to get that additional 40 to 60 billion? The state of Texas passed a constitutional amendment several years ago that said there will never be an income tax in the state. So really, the only other option is consumption tax. They would have to raise the sales tax rate to make up that difference. And you've had a lot of experts and analysis done on what that sales tax rate would end up being. But it would be significantly higher than what it is now.
Haslett: And generally speaking, that's a regressive tax unless you make it a sales tax on a particular type of commerce. And then that could be a contentious discussion.
South: It's very contentious, that's correct.
Haslett: Yes. So Howdy, you know cities. Their relationship to this can get misconstrued sometimes. There are some misconceptions out there about the relations the relationship between municipal government and this process. So this is an opportunity to explain how the cities fit into all this.
Howdy Lisenbee: Mark, I appreciate that. And Brent, thank you for being here. It's always good to have a conversation to try to shed some light on some of the taxation issues that, that people deal with daily, but maybe don't see all the details behind the scenes or in the weeds. And so when you receive a tax bill there's two halves of that calculation.
The first half is the appraisal value of the property, which is performed by the appraisal district. And so the school, the city, these taxing entities are not involved in setting appraisal values. It's actually a violation of state law if we do. And so if any taxing entity tries to influence the appraisal value of a property that's a significant violation that includes prison time. So the first half of your tax bill is the appraised value of your property.
The second half is the tax rate that the taxing entities set. And so the city's role in this process is as Brent explained for the school district, is that we determine based on our budget a level of revenue that is necessary to support those public services. And then what tax rate generates the revenues necessary to provide these services to the community. And so our role is we step back during the appraisal phase. We step forward when we're setting the tax rate. But some of the confusion is when everybody gets their appraisal report, they call the city mad because their appraisals went up. I'm sorry. I wasn't there. I didn't have that conversation.
South: But trust me, they eventually call us also.
Haslett: Yes. Yes. They start out mad at howdy and then they realize that they're actually mad at Brent.
South: That's right.
Lisenbee: And I think part of the bigger conversation then is there are public services that need to be or should be provided. There are other services that can be debated whether they're actually really important or not. But some of your fundamental services that are public in nature, police, fire, streets, schools, there are services that benefit the community and benefit society. How do you pay for those? And so there's a difference between a tax and a fee. And so what we're talking about is taxes. And that is, generally speaking, a process to raise revenue. that isn't really connected to your individual cost or use of the service. If I can tie your use of the service to the cost of the service, that becomes a fee. And we're talking taxes. And so there are people paying school taxes that haven't had a child in school in a generation or two. But it is still a, service that provides for society and the community. And so it's paid for with taxes rather than fees.
What did the 2023 Legislature change about the appraisal process?
South: So historically in the state of Texas your homestead property had a 10 percent cap on appraisals. So for example if your market value of your home was $100,000 in the previous year, And it got reappraised to 150,000 the following year. The taxable value was capped at 110,000, but that only applied to homestead properties. So all other real property did not have any type of cap. And this was one of the things that was highly debated between the House and the Senate on these caps. And they're not really technically called caps. They're called circuit breakers. Our lieutenant governor said that he would never pass a cap on all real property. So at the last minute, whenever they passed a cap on all real property, they called it a circuit breaker. So it's a 20 percent circuit breaker for all real property, that's non-homestead, that has a value of $5 million or less. So if you're a commercial property owner or if you have vacant land, that does not qualify for a homestead exemption, and it's below $5 million of market value, you now get a benefit of a 20 percent cap. So if your value goes up more than 20 percent year over year, your own your taxable value is only going up 20 percent.
Lisenbee: And on our side of the equation each year when Brent and his team sends us the report on the valuations for our community, we see a total value assessed and then there's a taxable value that is a lowered number, and so we calculate our revenue needs and our rates. Based off that lower taxable value, not the actual market value.
Haslett: Okay I think I'm getting my wee brain around all this. It is a bit much, but that, that reminds me of doing your personal income tax, where you've got your actual income, what you earned, and then there's your taxable income. And then that's the figure that you use to start all the other things. So now it was interesting - the range of values that this applies to. What was that again? Because you mentioned that certain properties that were of a certain value than that did not apply to them.
South: Right, so it's all real properties below 5 million of market value. So what that creates is a situation where you have property owners who have values above 5 million. They're going to be picking up that slack. So any time you have an exemption or a cap or some type of special valuation.
Lisenbee: Circuit breaker.
South: Circuit, excuse me, circuit breaker. I don't want to upset the lieutenant governor.
Haslett: He’s already mad.
South: That's right. Anytime you have one of those in place, it essentially shifts the tax burden onto everyone else because the cities and the county and the school districts still need the same amount of revenue to operate. Their costs aren't going down. They still have to provide police and fire protection, roads, water, infrastructure, public education. All of those costs are still there. But anytime you or I or anyone gets an exemption, those who do not qualify for that exemption have to pay more. It shifts that burden.
Haslett: My guess is that those property owners whose properties are high enough in value to where they weren't eligible for that cap we're talking about big businesses typically rather than wealthy individuals?
South: Yes. You're talking about –
Haslett: Of course there's some wealthy individuals, obviously –
South: Right. But you're talking about industrial properties. A lot of your apartment complexes, hotels, motels, retail strip centers your higher-end commercial properties will not qualify for those caps.
Haslett: Just, this is anecdotal and it's not really quantifiable, so I'm not trying to get a definitive answer from you about this. But that just seems, not necessarily counterintuitive, but it seems curious to me that there wasn't more of a hue and cry from that sector when these measures were being worked out because normally folks who have a whole lot of money tend to have their interests very well represented in the Texas or any other legislature.
Lisenbee: That's why it was contentiously debated.
South: That's right.
Haslett: There you go.
South: Yeah. The cap, or the circuit breaker, on all real property that's non homestead. That was, they had more discussion on that this past session than anything I can remember. And what ultimately happened, Senate Bill 2 finally got passed out of the second called special session. And it happened at the last minute. There really wasn't a whole lot of input from any of the stakeholders. I think that a few of the key members of the House and key members of the Senate got together behind closed doors and said, How do we make this work? We promised property tax relief. We're stuck on these caps. What do we got to do to get there? And the compromise was a 20 percent circuit breaker. The House and some of the members of the legislatures were wanting a five or 10 percent cap across the board on all real property. So the compromise was 20%. On real property with a value of 5 million or less. And I think that's ultimately, it was just a straight compromise to get the bill done.
Haslett: Interesting. Something that we anticipate happening in the next legislative session is, we anticipate that the school vouchers or the official phrase, speaking of official phrases, the educational savings accounts, that's something that the governor tried very hard to make happen this last time around, he was not successful. He came close. But many rural Republicans particularly, were against vouchers. We had a situation in Texas House District 1. Where the incumbent Gary Vandeaver just barely held on to his seat. He was an outlier in that he was among those rural Republicans who did not support the educational savings accounts. Elsewhere around the state, for the most part, incumbent Republicans who were against the governor on that particular issue lost ground. I've seen some articles suggesting that the governor might've picked up about a dozen seats in the legislature as a result of incumbents getting primaried or choosing not to run again. And folks who are in favor of the school vouchers getting the Republican nomination and safe Republican districts. So all of this means that regardless of what does or does not happen, it looks likely that the school funding system is in for some changes. And so how does the current situation with appraisals look for schools, just generally speaking?
South: And you're absolutely right, the governor was very vocal that he was going to primary those that weren't in favor of his program.
Haslett: And he was mostly successful.
South: And mostly successful, that's correct. So it's going to be an interesting dynamic in the legislature this next session with all these new members. And a lot of the a lot of the long time members no longer being there. We even had the Speaker of the House, Dave Phelan, he had a pretty tight primary. He had to go to a runoff, so we don't know if he's going to retain his speakership or not. So there'll be a lot of changes this session. But as, as far as that impacting the appraisal process. The only way it would impact the appraisal process is if they were to also make changes to the school district property value study, which is conducted by the comptroller's office to ensure equitable distribution of state funding for public education.
So right now, every two years, the comptroller's office does a ratio study of the values of our appraisal district to make sure we are hitting that 100 percent market value threshold. Because if, for example, if you have two school districts that are identical in every way, but school district or the appraisal district for school district A is appraising at market value, which is the current law, and appraisal district B is appraising at 70 percent of market value. Even though those two school districts are exactly alike in value on the books, it's going to look like school district B doesn't have as much property wealth. So they would get additional state funding. They would receive more state funding than what they should get because the appraisal district was under appraising. So that's the purpose of that property value study. So I don't know how the educational savings accounts or vouchers would tie in, but it may cause a situation where there's not as much of a need for the property value study. Therefore, you may have some appraisal districts without a study, they may decide we don't really need to be at market value or need to be as aggressive on our appraisals because no one's watching. I hope that's not the case.
Lisenbee: I think the bigger impact is going to be on the second half of that tax equation. Because nothing changes from the appraisal process of the property, but for the school district, they still have services to provide, and they still have costs that are incurred in providing those services, and they have fewer people, they have less revenue coming in because of the state money that's been handed off to the vouchers. That means the local taxpayers are probably going to have to step up and pay more to offset that lost revenue from the state. And the general public is probably going to pay higher taxes to offset the lost revenue from these vouchers. And so that means the larger group is going to subsidize the smaller group that are taking their kids to private charter schools.
How do Texas districts appraise property?
Haslett: The thing that I'm sure many, many people have asked you is like, well, where do you get that number? So before we're done this morning, let's talk about where do you get that number? What data and processes do districts like the Hunt County Appraisal District and every other appraisal district out there in Texas, how do y'all come up with your, appraised values?
South: That's a great question. We have a large dart board that we just close our eyes and throw.
Lisenbee: I have one of those in my office, too.
South: Yeah, and wherever it lands, that's your value.
Haslett: I thought it was like one of those little organ grinder monkeys that threw the dart out.
South: That's it. Yeah. No, it's a, it's a very technical process. And, you know, we don't set market values. We report market values.
Haslett: Okay.
South: And we follow market trends. We follow the market. We analyze the market. We get data from third party sources. It's interesting to me in the state of Texas, we're to be at 100 percent of market value by constitution. But Texas is a non sales price disclosure state, and the basis of accurate and good appraisal is comparable sales information. So we're told to do a job, but we're not given all of the resources we need to do that job.
If you go out and get a fee appraisal done on your home for a home loan or home equity loan, that fee appraiser is going to compare your property to four other or five other known sales of like properties to come up with the value of your home. We do the same thing, but we do what's called mass appraisal. So we're doing a lot of analytics. We’re dividing the county into market areas. We're gathering as much sales data as possible again, and we do have to purchase sales data through third party vendors. And we put all that into the mix to determine What has the market done year over year?
Our assessment date each year is January 1. So we're looking at January 1 of 2024. And what's been interesting this year, we had to shorten the time frame of sales data points that we used because up until about September of 23, we saw the market was still strong, steady, increasing. From September to January, it leveled off and then beyond January, we saw some areas actually where the market value started coming down. Homes were staying on the market longer, interest rates are higher, and so there's just not as much demand as what we've seen in the past. So the sales information we use was a smaller sample because we knew if we use sales data points from early 2023, it would inflate values and we would have people's appraisals higher than they should be.
But that's what we do. We analyze the market, we gather data, we build schedules, we calibrate those schedules, and we come out with mass appraisals. And the reason that the legislature, allows property owners to come in and protest these values is because of the fact that we do mass appraisal. We're going to have mistakes. There's no way that we can get every property at 100 percent market value, 100 percent accurate every time. So we send out the appraisal notices in April. Property owners have 30 days to file that protest. Unfortunately, that 30 day time period has already passed. We are still going through the protest appeals process right now. But It's just, when you're doing mass appraisal, we have 73,000 properties in Hunt County that we have to set a value for every year. We don't have the staff or the resources to go out and do an individual fee appraisal on each property. So we have to use those mass techniques.
Haslett: Would there be anything that, in your opinion, or perhaps in the opinion of other people in the world of appraisals, would there be anything that the state government could do to make your process as far as coming up with that value, make it more accurate, make it simpler, make it easier? Something that would help you all come up with the best numbers to reduce the necessity for this appeals process being kind of an inevitable correction process?
South: Yeah. You know, again, I go back to mandatory sales price disclosure and that's a dirty word in the state of Texas and the Realtors Association is never going to let that happen. And I understand that we in Texas, we like our privacy. We don't want the government knowing all of our business. But it's just very challenging when we have a task, but we're not given those resources that we need to complete that task. And it's alluding to what Howdy said earlier, the two pieces of the equation, the appraised value and the tax rate. You know, we get 10,000 people a year come in and protest the appraisal. And I tell people all the time, we could lower everyone's appraisal by 50%. It's a simple formula in our software, where we could just run it. And within a matter of seconds, everyone's value would go down by half. That does not mean their taxes are going down by half, because the cities and the school districts and the county still need the same amount of revenue. So if our values go down by half, to generate that same amount of revenue -
Lisenbee: Rates double.
South: The rates double. So, it's, you know, there's always that perception, higher values mean higher taxes, or lower values mean lower taxes, and that's really not accurate.
Haslett: It's all about that tax rate.
Lisenbee: It is. And so, we try to focus on the services that we provide and controlling the cost related to those services. But sometimes those cost factors are completely out of our control. And so if people want to see a major drop in their taxes, that means that we need to have a major drop in the cost of the services that we provide. And so that means you reduce the level of service. And so if, if you want to pay less taxes, That means you're going to get less service. And people want top shelf service with bottom shelf prices.
Haslett: That's human nature.
Lisenbee: That's what we try to provide every year.
Haslett: Well, yes, every, everyone likes it when the cake is served. Nobody wants to be in the kitchen breaking eggs and making dishes messy and all that.
Lisenbee: And a conversation, and I know we're wrapping up, but a conversation we have frequently in Commerce, it's not a secret that the quality of the road system in Commerce is poor. That's true in many, many towns in Texas. But people will make the statement, we pay our property taxes. Why isn't our street fixed? The reality is, is that if you take the total allocation of property tax revenue that we receive as a city, that does not cover the cost of police and fire. And so our cost to provide police and fire services, this community is greater than the total revenue we get from property taxes. And so when you pay your property taxes, you're paying for police and fire protection more than anything else. So there's not excess property taxes laying around that we can then go do some extra work with. And so there's services that we provide and we control the cost of those services so that we can try to control those tax rates. That's the part of the equation that we get to influence.
Haslett: And, it's not like those police and fire are getting wealthy.
Lisenbee: No, they're not. And then you have Sherman. Sherman, Texas, who's getting billions of dollars of investment from tech companies, just significantly raised salaries for their law enforcement. And so we have to compete with that. And we don't have the investment of a local tech company.
Haslett: That's true. Although, to be fair, y'all have worked pretty hard to help get those police and fire salaries up.
Lisenbee: They are now paid a market wage. They weren't for years.
Haslett: Yes. Well, I, I think that everybody can be happy about that. So, Howdy Lisenbee with the city of Commerce? Brent, we're going to wrap up here in a moment and go back into a Newshour from the BBC World Service, before we're done, I just want to leave it open ended for you. Anything else that you think would be of interest to our audience this morning?
South: Yeah, the last comment I'll make - Even though we have gone beyond the time to protest the market value of your property, the good news is that you still have an opportunity to participate in that process. In August, once we've certified the appraisal roll and sent those numbers over to the taxing entities, as they go through their rate adoption process, they're required to post all of their information. There are no new revenue rate, voter approval rate and proposed rate on a website. That website is hunt.countytaxrates.com. Each individual property owner can go to that website, pull up your property, and you can see the taxing entities that levy a tax on your property. You can see what their proposed rate is versus their no new revenue rate versus last year's rate. And you can see exactly is the rate that they are proposing to pass going to be a tax increase or a tax decrease for me. Through that website, you can actually communicate back with the elected officials via email. And let them know, hey, I have concerns about your proposed tax rate. So, there is still an opportunity to be part of the process. And I would people to go to that website and just see what your taxing entities are intending to do on their tax rates.
