Austin’s City Council has created a new homestead exemption for homeowners – 6 percent last year and 8 percent for 2016. By some reports the 8 percent exemption will “cost” the city $15 million, but that’s funky math.
In fact, the exemption “cost” the city budget nothing. The new general revenue budget is nearly $100 million higher than it was two years ago – an 11 percent increase since the homestead break took effect.
Most certainly no programs were harmed in the making of this exemption.
So where did the money come from?
The city paid for your homestead exemption by raising the very taxes they claimed to be cutting. Property tax cuts were paid for with property tax increases.
Unlike the sales tax or the income tax, in which the tax rate is fixed in law, there is no fixed property tax rate. The rate is adopted each year, based on the budget a local jurisdiction adopts. This year the city of Austin adopted a generous budget that will require some $550-plus million in property taxes.
If the city offered no homestead exemption, the tax rate necessary to raise that money would be $0.4299 per $100 of taxable value. But offering a homestead exemption reduces the amount of value the city can tax. The 8 percent homestead exemption removes about $3.5 billion in property from the tax rolls. To raise that $550 million to pay for the budget, the council had to adopt a higher tax rate of $0.4418 — about 3 percent more than it would have been without the homestead exemption.
The final rate the council adopted was less than last year’s, but by no means was it a “conservative” rate – it was the highest rate the city could legally adopt without being subject to a voter petition drive to roll back the tax rate.
The owner of a $286,626 home (Austin’s median value) will be told they got a tax break of $101 from the homestead exemption. But, in reality, they also will have to pay $37 more because of the higher tax rate to pay for that exemption. That means a net benefit of only $64. Homeowners are getting some false advertising: their 8 percent tax break really only saves them closer to 5 percent.
Citywide, homeowners got a $15 million tax break, but had to pay $5 million in higher taxes for the privilege — not a bad deal, but certainly not as good as advertised.
But where did the council get the other $10 million?
It was paid by renters and businesses. That 3 percent higher tax rate applies across the board to all properties. That means, for example, a small restaurant will have to pay about $120 more in city property taxes because of the higher tax rate. And those who rent in the city will have pay about $12 a year in higher rent as their landlords ultimately pass the tax onto them.
The lure of tax cuts is a tempting one — especially for homeowners, who vote in high numbers. But property taxes are a zero sum game. If you take property off the tax roll, those left on the roll must carry a bigger share. If the council is really serious about easing the burden on property owners, the solution begins with the budget, not with a political shell game.
Craymer is president of the Texas Taxpayers and Research Association (ttara.org), a nonprofit, membership-supported organization of businesses and individuals interested in the state and local fiscal policies in Texas and the way those policies impact the economy.