The Texan Podcast - Interview: Vance Ginn on Texas Property Tax Relief Standoff

Episode Date: June 27, 2023

Want to support reporting on Texas politics that doesn’t include the spin? Subscribe at https://thetexan.news/subscribe/ This week, Brad Johnson, interviewed economist Vance Ginn about the competing property tax proposals that have been debated as the stalemate on relief continues between the Texas House and Senate.They discuss the policies at the center of the debate — homestead exemptions, appraisal caps, and compression rates — as well as the possibility of eliminating the school maintenance and operations portion of property taxes.Enjoy this content? Be sure to subscribe for similar interviews and The Texan’s Weekly Roundup — a podcast released every Friday that brings you the latest news in Texas politics.

Hi everyone, this is Brad Johnson, senior reporter at The Texan. Today we were joined by Vance Ginn, president of Ginn Economic Consulting, formerly of the Texas Public Policy Foundation. We talked property taxes, what it is, the various strategies by the legislature to reform it, provide tax relief, why the legislature is at such a stalemate, and the prospect of eliminating the largest components of property taxes in Texas. Hope you enjoy. Hey, Vance. Thanks for joining us today. Hey, Brad. It's a pleasure to be with you today. We are going to talk property taxes and nothing but. right up your alley. You know, as we know, this has been a long road coming.

The legislature is still in a stalemate on this issue, which I thought is kind of surprising. Going into the session, I didn't think this would be the one that would not yet get across the line. Are you shocked by where it's gone so far or where it hasn't gone, rather? Yeah, Brad. I mean, as you know, during session, there was a lot of talk about property tax relief and how much was going to be provided, which directions we were going to go. We had these two different, you know, kind of competing property tax proposals between the House and the Senate.

And, you know, look, I was pretty sure that they would do something by the end of session to make sure they got it over the finish line to get something done. This is one of the biggest items that's on the minds of Texans all across the state. And it was unfortunate that they didn't. And I was glad to see Governor Abbott call him right back. I mean, it was like that later that night or whatever, whenever he called him back. And so we're almost coming up to the end, the special session now, first special session. And who knows how many more we're going to have, but I hope they get something done because taxpayers need some relief as soon as possible. Yeah, we heard Governor Abbott in his campaign call for the largest tax

cut in the history of Texas. Lieutenant Governor Patrick reiterated something similar. Speaker Phelan has also talked about how important it is to provide this. Overall, though, you know, we're still stuck. And there's kind of been a divide between strategies on how to apply this. At least in the budget, it's $12.3 billion that's itemized, correct? That might increase, we shall see. But, you know, the three strategies generally are rate compression, a homestead exemption increase, and the application of a reduced and extended appraisal cap. Just so we kind of level set on this, can you describe what each of those means in as best layman's terms as you can? Yeah, yeah, yeah. I'll take off my PhD economist hat for a minute, you know, layman's terms as you can. Yeah, yeah, yeah. I'll take off my PhD economist hat for a

minute, you know, because this is something that's been confusing throughout session. I'll start off with the homestead exemption first, because I think that's the one that people are most familiar with, which is the homestead exemption basically is the amount that you'll be exempted for your school maintenance and operation property taxes, just starting off with that one first. Right now, it's at $40,000. It has been increased three times to get to where it is now. The last time it was raised was in 2021 legislative session from $25,000 to $40,000. And now the talk has been to raise that, meaning exempt a part of your appraised value of your home by somewhere between the range of $70,000 or up to $100,000. So you would take that off of how much ever the rate is that you're going to pay. And then that would be your tax liability, the amount that your bill would be at the beginning of the year,

whenever you receive your tax bill for those property taxes. So that's just a way to exempt, cut off a certain amount of your property tax. And who does that benefit disproportionately? This is all picking who's going to see a bigger tax cut more than someone else. So for homestead exemption, who does that benefit more than anyone else? So the homestead exemption benefits homesteaders. Those were the primary residents. So if they have their first residence where they live, what's called their primary residence,

that is their homestead. That's what they've homesteaded out through the comptroller's office or the county's office, appraisal office. And then they say, look, this is our homestead. That's where you'll get the benefit. If you have a second property, that would not benefit from the homestead exemption.

If you had a business, you would not benefit from the homestead exemption. If you had a business, you would not benefit from the homestead exemption. So it does benefit the ones with a homestead, which I call homesteaders the most here. And I think if I understand correctly, those with lower home values will see a more pronounced benefit from that reform than someone with a very high home value, correct? That's correct. Yeah. Because if you go from $40,000 to $100,000, let's say that's really being discussed right now, that $60,000 off your taxable liability, which is going to mean a lot more for somebody that has a $200,000 home than it would be a million dollar home or a $2 million home or 500,000. So in that sense, you're helping out lower income people more than you would upper income people.

Next, let's go with rate compression. Yeah. So the rate compression, and this again is one of those terms, compression, like what the heck does that mean? And it basically just means that you're reducing the school maintenance and operation property tax rate down such that the revenue that's coming in goes down as well. So in simple terms for a homeowner, instead of raising your homestead exemption, your taxable value, it's bringing down the rate such that the amount you're going to pay goes down. So it tends to last longer when you do it this way. That's one thing about the homestead exemption, that if you have an increase in your appraisal, then it evaporates. That savings evaporates pretty quickly, especially when we

see higher inflation and everything else going on in the economy, whereas the compression continues to compress down. And that just means reducing those property tax rates. And if you think about it across the state, there's a little bit more than $30 billion that's brought in every year from those school maintenance and operation property taxes. And so that's been the big discussion this session is what do we do with those? It's about 40, a little over 40%, I think about 42% of the total property tax that's collected across the state. If you count it in schools, the INS, which is basically interest in sinking the debt portion, cities, counties, special purpose

districts, and then their debt as well. The M and O for just schools is about 42 percent of that overall burden. And what that's trying to do is to say, look, let's take some of the state surplus dollars, not raising the sales tax rate, not changing the tax base for the sales taxes or anything like that, just using surplus revenue, which just means the amount of revenue that's coming in above the amount of spending or what's been appropriated. Let's use a portion of that. Some have argued, including my work, of 90% of the surplus should be used to buy down, reduce those property tax rates, compress those property tax rates each session until they get to zero. And that's been kind of the path to elimination over time. And so the compression is simply, again, is just reducing property tax

rates instead of raising the homestead exemption or something else. And so when a property owner gets their bill, they have obviously the various political subdivisions that are taxing them in different sections of their tax bill. But within each of those, whether it's school, city, county, they have two components. You mentioned the M&O, the maintenance and operations, and then the INS, the interest in sinking, which is typically for capital expenditures, right? So like if you build schools, that will be applied through the INS, correct? Whereas maintenance operations goes towards maintenance and operations of the school itself. So there's that aspect. And the M&O is a much higher proportion of

That tax bill in each of those political subdivisions and especially so for schools, right? Correct. That's right. Okay So now we have that you know the other the other part part to mention is that This compression you talked about comes out of the state surplus The school finance system is kind of like a seesaw. On the one side, you have local property taxes collected, and on the other, you have state funding. And so as the compression is applied, the state is itself buying down, lowering those local property tax rates. Do I have that correct? That's correct. And I would just add

to that, part of this is to get to where the state pays 100% of those school finance formulas, if you do the complete compression over time to zero, right? So right now, the state's portion is a little bit less than half. But if you include the compression and other things that the state has done during the budget cycle or in the budget this legislative session, it would put the state funding more than half of public education across the states. And the way that I like to put it, Brad, and I like your seesaw analogy there, another one I like to use is kind of a bucket. When you get this bucket of how much money is going to go in per student across the state, which the M&O portion is about $10,000 per child in the state.

A portion of that bucket first is going to come in with property tax revenue to fill up that $10,000. And then anything else that's needed to get up to $10,000, the state fills in on their side with sales taxes, franchise taxes, lottery revenue, and some other things that they use to put into for public education, their general revenue. And so whenever you have this bucket, many places across the state with lower valued home areas, then Austin, for example, means that the property tax won't bring in enough to fill that $10,000. And that's where the state comes in from the rest. Now, some places though, has it to where, you know, the Hyde Park, Highland Park, some of these places that have a lot of property tax revenue that have high values overall, right? They bring in that property tax revenue and it

overflows that $10,000 bucket. And then what the state does is it takes that money and it can also use that money to redistribute to other school districts across the state based on the weighted average daily attendance, just how many kids are on there on average, and there's different weights that they use. But that's the school finance formula that we have set up, which is already determined by the state legislature. They're the ones that determine the school finance formulas and everything else. Yes, you have that local property tax revenue that's coming in that's going to fund the bucket. But remember, the bucket is set by the state legislature. And that's one reason why there's been so much focus on what the state can do to school M&O. Because in many ways, the Supreme Court has also found this over time,

that it's a statewide property tax, essentially, which is why we have this Robin Hood system, which is why they compressed from $1.50 to $1 back in the 08, 09 cycle. And now again, you have a situation where we're talking about how do you lower property taxes? And the one that the state has the most quote, you know, quote unquote control over is the school M and O because the city, they control that, that stays locally, the county stays locally, and the special purpose districts all stay locally. It's only the school M&O portion that's really a state-determined amount and the formula that's there. Just a little more background on how those fundamentals work, because I've heard differing views on that about why is the state involved with what local governments are doing, and I get that as a fiscal conservative, I'm concerned about that, but we've got to understand that the school M&O portion is really determined

by the state already. It's local in name only when you think about the local property tax for ISDs. And that redistribution function that you were talking about, that's Robin Hood. That's what you mentioned, correct? That's correct. That's all through the school M&O property tax is the only place we have Robinhood. None of the other ones have a Robinhood system. So if you get to elimination through compression, which is what kind of the push is right now by some, is that that would eliminate Robinhood as well. And then finally, the third strategy we've seen in this property tax debate, the appraisal cap. That's pretty much off the table right now. But can you tell us a bit about what that entails?

Yeah. And Brad, just real quick for the compression. We talked about Homestead, who that helps, kind of the lower valued homes more than upper valued homes. The compression, it tends to be, it's equal in the rate, right? Because the amount of cents that's being paid by a lower income of maybe a $200,000 home versus a million dollar home, the rate is going to be brought down the same. So in that sense, it's equal distribution of what the percentage that's going to be benefited for each one of those. But now the dollar amount would definitely be more for upper income than the lower valued homes, right? So in that sense, it would help out upper income people more than lower income people with compression, but it would be the same rate

cuts, right? And because the idea is to get all these rates down to zero over time. And that's the reason why it could be more of elimination compared to something else. And so I think that's also part of this discussion, Brad, is that the homestead is helping kind of lower-income people while the compression is helping upper-income people. And so there's some of this, I don't know, populist divide that's going on to some extent just between those two approaches. There's also the added component of businesses versus homestead homeowners. Should we allocate a specific segment

of this roughly $12 billion for homeowners explicitly, or should we allow all of it to benefit businesses included, everyone who pays a property tax rate that includes homeowners and businesses as well? anything else you want to add on that? Yeah, just real quick is that the homesteaders, I mean, it primarily is helping homeowners, right? And there could be some indirect benefits to that because if the homeowner has a homestead and they also have a business, then you're reducing the amount that they're going to have to pay for their property tax for the homestead that could free up available investment money for their business. But it's more indirect than the direct effect. Whereas compression is a direct benefit to homesteaders because their rates are going down

to landlords like those with apartment complexes. So renters will benefit. And then businesses or employers will also benefit because their rates that they're paying for their property, for their business is going to go down. And, you know, I've gotten some pushback because they'll be like, oh, well, renters won't benefit from this. The landlords will just profit from that. But that's not how competition works. You know, if you had one apartment complex that I'm in right now and there's a unit that's across the street that's available, and you cut their property tax by 16 cents, they have more incentive now. Incentives are in place for them to lower their rent until they get somebody to fill it. And if we know as Texans that property taxes are going down, yeah, I can't break out of my lease today or tomorrow, but I can next time that it comes up, I'm going to go look for somewhere that's cheaper. And then that competition to fill each one of those units by the landlords across

the state will bring about lower rents in the process. And if they don't, they're going to go out of business, right? Like there is a market that's out there and the market isn't set by this property tax because the property tax distorts the market. It reduces the supply that's available otherwise, while also reducing the quantity demanded. If you get rid of the property tax, the supply will increase at least over time. And it will also put downward pressure on that price because more people will be out in the market shopping around and negotiating. That's how competition works. And so I think this will reduce rents, it will reduce homesteaders,

and it will what they're paying for their mortgages and everything else and their escrow for property tax and for businesses. So it helps all of them out at the same, the same time, even if it may not as be as much for just the homesteaders, like the homestead exemption does. I hope that's provide some clarity. Is it fair to say that that argument you just outlined, um, you know, it's more on the longterm, um the long term than, you know, the immediate short run. The thing that will make it longer run is that people are tied up in their leases. So if you're in a lease for a year, you wouldn't be able to renegotiate until after a year. But I do think the people that were on the market right then, they could see some benefit from this pretty in a short time frame.

I don't think it would be that long, probably within six months. Let's say within six months to a year, we would see that. But I also think that given that you have these lower costs, what do businesses usually do when their costs go down? They'll either invest in their business and expand their supply. So maybe we see more supply of housing, rental units. We also see apartments growing, and so that will increase supply. But they may also change up some of their other practices in order to reap the profitability. So that's what profit and loss really brings about here. And I think that if a lot of these rental units don't lower their price, they will lose.

They will have losses because no one will rent their unit. So it will pick up at a pretty fast pace. Okay. Let's now go back to the appraisal cap, which as I said, is kind of dead at the moment, but who knows what happens. It could get revived even though the Senate is pretty hell bent against it. But Kenya, can you explain a bit what that is? Yeah. So appraisal cap is something that we already have out there. If you have a homestead, which again goes back to homestead, but this is a homestead for really all of your property, right? Or all of the entities that are taxing you, it's according to your appraisal cap. And currently if you have a homestead, it's 10%. So that means the appraised value of your home can't go up more than 10%. So all of the jurisdictions that tax you that are local for

your property tax, they can only get 10% of your appraisal side times the tax rate. And then that will determine your tax liability. And so there's been some discussion over time about is the 10% rate right? Should we change that or do something else with it? And so there's been some discussion, especially in the house with their bill that said, and this was during the regular session, not in the special session, to lower that appraisal cap from 10% to 5%. And this would be for all property, which it wouldn't just be the homestead. It would be for all property. So right now for an employer who has a business, they can go up by 150, 20, whatever the percentage is, increase in their appraised value can go up by that amount every year. Well, this is trying to say, look, let's stop that.

This runaway appraisal creep, if you will, going up too fast and too much is putting a large burden on our economy and businesses and everything else. And let's also reduce the amount that can grow for homesteaders. So let's set it at 5% for homesteaders, rental properties, other property, and for businesses. And so that is a big expansion compared to what we have under current law. And so that could be a big benefit for homesteaders, renters, and property owners because you're limiting the growth. The problem here though, is that it doesn't reduce your tax liability. I mean, it could reduce the growth of your property tax liability, but it would not bring anyone's property tax bills down. And I think that is why folks like myself and others have been pretty critical of the appraisal cap itself going down. I like the idea of reducing the value part of it,

the appraised value portion, of limiting that growth from 10% to 5%, but it doesn't bring anybody's tax liability down in dollar terms. And that's what people want across the state, is to bring that down. You also can't get to zero. And this has been another one of my big pushes is to eliminate property taxes. And Brad, I want to eliminate all property taxes at some point, not just the school M&O. I know that's what we're talking about today. And that's the one that's getting the most. And I'd love to talk about that sometime too. But you can't get to zero from the homestead exemption increasing because you can go to a hundred thousand, a million, 2 million. Somebody's still going to be up there at the top. You could do it if it was a rate, like a homestead rate of 10% of your valuation we're going to exempt. And then you

could get up to 100% and do it that way, but nobody's talking about that part. But the compression is where you can get to zero, right? Because you're reducing that rate. You can reduce it all the way to zero to where everyone's at zero. And again, with the appraisal cap, you can't get to zero. You can't eliminate it by just slowing the growth rate. And what's interesting about this is that when you look at other places that have a lower appraisal cap, like in California, there was Prop 13, which was a big reform back in the day, and they limited it to 1% increase per year. And the idea was, is that that should slow down property taxes and everything else.

And it does for those who keep their property and don't sell and buy something else. Because as soon as you sell and go buy across the street, let's say the same exact house, you had $100,000, you're limited to a growth rate of 1%. You buy across the street at $200,000, you're going to be paying that new tax bill, not the old tax bill. And so when you do that, we have what's called a lock-in effect. And the lock-in effect incentivizes people to stay in their homes longer than they otherwise would, which reduces the supply of homes in the marketplace and drives up prices because demand continues to go up. And when that happens, that means that as soon as you sell and go buy somewhere else, that you're losing out. That's a cost to the consumer for them to want to expand their home

if they get more kids. I've got three kids now. I've had to move up some as far as number of bedrooms. It makes it very costly to do that on your tax burden. And that's one of the reasons why I think that the distribution of who is affected ends up being those who are lower income the most because then they can't afford that new home because of those distortions to the marketplace. And so while it seems good in concept of a lower appraisal cap, the economic implications and the finance implications are very costly. Now, I'm glad you mentioned that because that was actually going to be my next question. You mentioned the California example. That has seen a lot of issues. And that was cited a lot

by the Senate, Lieutenant Governor Patrick, in arguing against the appraisal cap. On the flip side, though, the House cited, when presented with this example, cited Florida. And Florida has an appraisal cap itself, too, different from California's and different from what Texas would have had under the House's plan. But they have not seen, at least it seems, such repercussions for an appraisal cap that California has. Can you talk a bit about that? What's the difference there? Yeah, no, that's a great question. When you look at the burden on homeowners, according to the Tax Foundation, Texas ranks the sixth most burdensome

in the nation. I mean, this is where we feel it. We feel this cost. Florida ranks about middle of the pack. I think it's 26th. And Tennessee ranks 36th, by the way. And some would say, right, that we don't have, we have such a high property tax because we don't have an income tax. I think these other examples show that that's ridiculous.. That's not the case. Florida and Tennessee also don't have an income tax and they rank middle of the pack or lower bottom of this, lower of the half as far as the burden goes. A big part of this is, yes, there are some reforms that have been made in Florida for the local property tax and maybe it's part of the appraisal portion. But remember that the appraisal portion is only one part of what determines your tax liability. It's your appraisal amount times the tax rate is equal to

your tax liability. Okay. So you can- Tax liability is the bill, right? That's the actual bill you're going to pay. Correct. And so you can limit your appraisal growth, but then the rate just goes up. And so that's also a seesaw of, that's what I think we'll see is that these local governments will want to raise your tax rate more to bring in the same amount of revenue. And why? Because of excess spending. So if you look at the spending that happens by our large local governments in Texas, compared to those in Florida and even in Tennessee, you see less government spending. Government spending is always the problem, not revenue. Revenue is just to fund whatever the larger governments are trying

to do. And in Texas, where we have these blueberries in a sea of red, those blueberries are very big. The Austin, the Dallas, even Fort Worth to some extent, Houston, San Antonio, they have a lot of big government policies that are driving up government spending, and then they need more revenue to bring in to fund it. Same thing goes with some of our education as well. One thing I would say about Tennessee is Tennessee doesn't have a school maintenance and operation property tax. It's one of the reasons why they rank 36th. The state fully funds are 100% the amount of public education in Tennessee, which is ultimately what I've been trying to work on. And I know the governor and others have been looking at is compressing to zero. That's how you

get to this, not through appraisal caps or anything else. We need something that's bigger and bolder to actually bring down tax rates. And so Florida is doing a better job. And the reason why, it's not because of their appraisal caps. It's because of the spending restraint that they have at the local level. What kind of function does that take? Is it the state setting a ceiling on school district budgets? Because here, school districts set their own budgets, right? Does the state control that in Florida and Tennessee, or is there something else? Well, I think it's a combination of things. So part of it is the school's portion. There's better limitations, I think, in place compared to here. But also if you look at some

of the other taxes that are out there, because you can look at their tax burden isn't just going to be the school portion. It's the cities and counties, right? It's all those other jurisdictions that are out there. They tend to spend less than what we have in places in Texas. And so when you look at those different growth rates, faster growth rates in Texas, especially from the bigger local governments than in Florida, you have to have more revenue. And they fund a lot of that here in Texas from the property tax. And that's what's driving a lot of this property tax growth. And a big portion of that has been the school property tax. And that's one reason why, look, I'm in favor of the state funding 100% of school M&O.

And that way you can get rid of 42% of the school maintenance and operation or the total property tax in Texas. And that would be a huge relief for Texans across the state. Before we get to that, we'll talk about that a lot more detail. But last week, we saw kind of two new proposals put out there, one from the Senate, one from the House. As we sit here on Monday, it looks like nothing is going to be settled on before the special session expires Tuesday. But the Senate passed a new plan last week includes the homestead exemption it includes rate compression that we had already seen previously but they added a couple other

factors one of which is an increase in the franchise tax exception that's you know an attempt to try and help businesses where the homestead exemption doesn't then we also saw a lowering of the voter approval rate for school districts. That passed the Senate. It's gone nowhere in the House. We'll see if it advances, but any thoughts on those components? Yeah, I mean, it was an interesting bill because it tried to bring together the things that have been discussed all session, you know, with the House doing their appraisal cap drop to 5% and about 15 cent compression is what they had initially. The Senate had their

homestead exemption increased to 70,000 and then a 10 cent compression. So they had both. The house had kind of another bill after that during the regular session that said, okay, we'll do a 15 cent compression. We'll do a hundred thousand dollar homestead increase and then bring, and then bring down that appraisal rate to 5%, the cap, the appraisal cap. And so that kind of died out at the end of regular session. And then the house and the special session brought in their bill that said, look, we want to raise that exemption. I'm sorry, the compression for 15 cents to 16.2 cents. That was the bill they passed and they left town. They're like, look, we're done. We're adjourned. We did what the

governor asked. Let's move on. And the Senate had a bill that would, like you said, raise the homestead exemption to a hundred thousand and have the 10 cent compression. And that's kind of what was discussed. And then we had this latest bill from the Senate of adding in some other components, you know, of, of the franchise tax, basically doubling the exemption. And the corporate franchise tax, Brad, I mean, if you look dollar for dollar at the marginal cost of each one of these taxes, I would have that one as the first one to get rid of. That one has a cost for the state that's very costly. It's a gross receipts tax. It's not based on your profit. It's a gross receipts tax. It's not based on your

profit. It's a gross receipts based on your revenue minus a couple of costs of goods sold and a couple of other things, compensation and 20% of the overall revenue. It's not based on your profitability. So it's really costly for businesses. And it's also costly for compliance. Just complying with that franchise tax is really costly. And so there is some, I think, interest and a need to do something with the franchise tax. However, when you talk to homeowners and Texans across the state, no one's really worried about the franchise tax anymore. I remember back in 2015, I was a big proponent of eliminating the franchise tax. I still am. That's where they cut the rates by 25%. And if I was going to propose something for the franchise tax. I still am. That's where they cut the rates by 25%. And if I was going to

propose something for the franchise tax, I would say keep cutting the rates. Don't raise the exemptions because the more you raise exemptions, the more that you narrow out the base, just like the homestead exemption, you narrow out, you reduce the number of people who are going to be paying that tax. And for a sound tax policy, you want the broadest base with the lowest rate possible. And so if you're narrowing out that base through raising the exemption for the franchise tax, that's going to lead to fewer and fewer people that are going to be paying it. And from what I understand, it's very few of small businesses actually even pay the franchise tax now. And so I don't know how much of a benefit that will actually be. And I think it kind of

confuses everything else that's going on. I think it was kind of a distraction. I did like the fact that, and so I would get rid of the franchise tax. Yes. But I don't know that this is the time to do that given everything that's being discussed. And then the last piece here is lowering that no new revenue rate of having, going out to the voters, which is currently 2.5% for school districts, lowering that to 1.75%. I think that's a good measure. I think that we need to have that as low as possible. In fact, I and others have been calling it for it to be 0%. School districts shouldn't get any more property tax revenue without going to the voters to vote on that. And then that would help to

maintain any sort of compression or homestead exemption relief that's provided. You wouldn't see the 2.5% jump up in what school districts could charge in their property taxes. Instead, let's say, look, if we're going to have a compression of 16.2 cents, let's get the whole 16.2 cents in compression. And if they want to go up from that, they've got to go out to the voters. And that would help to make this longer term and not have the ratcheting up effect of more property taxes having to be paid by homeowners across the state. So I think the first two were okay, but I'd like to see all this go to compression. They raised it to 12.6 billion, and that would be a 16.7 cent compression compared to the 16.2 cent compression that's over in the House. Okay. And on the flip side in the House, another proposal was released last week

by Chairman Dustin Burroughs, tax assessment increase limit. It's a new strategy that's different from anything I've seen so far, whereas most reforms are addressing the components of that property tax equation, the rate times the appraisal for taxable value. This would put a cap on the actual amount of money you can be taxed in your bill. This would be starting at seven and a half percent, at least the proposal lays out. Have any thoughts on that? Yeah, no, I think it's an interesting idea that should be considered because this is different than the rollback provisions of SB2 from 2019 because that is more of a macro level of a local

entity could not bring in for school districts in this case, more than 2.5% is current law. That's at the macro. So that means that some individuals would pay less than 2.5% and some property owners would pay more than 2.5% such that the school district doesn't bring in more than 2.5%. And the same could be said for cities and counties and some special purpose districts, which are at 3.5%. So they've got a little bit higher rate, but that's what that is. Um, but the issue here now that chairman Burroughs has brought up in this idea is that every property owner, whether it's a homesteader, someone with an apartment complex or a business, they would be limited to 7.5% increase across all of those taxable entities.

And I think in Round Rock where I live, I think I have six taxing entities. So how many ever you have on your property tax bill, the total, it seems like of those, and maybe it could be each city or each county. I think I want to look at the details of how this would be, but let's say their bill cannot go up by 7.5%. That would provide indirectly a limit on what each one of those taxing entities could tax you by. Right. So that would create, in some sense, an indirect spending limit because of the amount of revenue. Revenue has got to equal their spending limit. They have a balanced budget amendment at the local level. Right. And so that does indirectly create a spending limit because you have, okay, here's my tax liability. The amount of my appraisal value is kind of fixed or it's given.

They're going to have to set their tax rates such that each person wouldn't see more than 7.5%, which is going to create a lot of complexity though too, right? Because if my home value is $100,000 and yours is $200,000, we're going to have different tax rates. And then what will that do to the equal and uniform property tax code that we have to have based on the constitution? I think that creates some constitutional issues. I am not a legal scholar. I don't play one on TV either. But as an economist, I like the idea of trying to figure out how to provide some certainty

to people, whether they're businesses or homesteaders for their families and everyone else. I just think that there may be some other issues to get there. What I've kind of suggested instead is why not use the current law that's out there instead of having the 2.5% for school districts, which is only on existing property. We should probably mention that. Why not make that for everyone? Make it for a new property, we should probably mention that. Why not make that for everyone? Make it for a new property, make that for businesses, homeowners, and rental, like apartment complexes to where they couldn't go up more than 2.5% or even 1.75%. I like that even better from Senator Betancourt, Chairman Betancourt, or 0%, right? Make that the no new revenue rate of 0%. And that would also put a better limitation if you put it across all property across the state. We don't

need to have all these carve outs and loopholes and everything else that came out of SB2 in 2019, because that's essentially what we're saying is SB2 in 2019 wasn't enough. We need to do something more. And I think that this sort of approach of broadening that SB2 to all property, making it down to 0% or something else would be a better approach. But I do like where Burroughs is at least going with this of saying, let's provide certainty and everything else. And the last thing I'll say on this is, that won't reduce anyone's property taxes though, either. It's got to be in combination, which I think is what Burroughs was thinking here is you put this in combination with the compression. And that would make this more longer lasting without those local entities just jacking up their rates and their tax

revenues over time. So it's another interesting idea, but I'm going to keep focusing on elimination and elimination is done by compression of reducing tax rates the fastest. So I hope that's where we end up getting more toward at the, at the end of the day and from, from the legislature. Okay. We got, we got a few minutes left and we'll, we'll go right into this elimination issue. So the TPPF plan, uh, which you used to work for, uh, still are affiliated with, um, you know, the, the plan cited, um, by governor by Governor Abbott, by many other legislators, is to use 90 cents of every surplus dollar to buy down that school district maintenance and operation rate over a decade to zero. First of all, did I summarize that well?

Anything you'd like to add on that? Yeah, I would say that I'm not with TPPF anymore or anything like that, but I did work on this a number of years there. That's where all this kind of got started for this compression. A lot of my colleagues there, we worked on this together to figure out what's the best approach to bringing down those school and middle property taxes over time. And I've worked on a lot of other research in that space as well, like broadening the sales tax base to eliminate the squamino property tax without even having to raise the sales tax rate. I know Lieutenant Governor Dan Patrick has talked about raising the rates to 19%, the sales tax rate. That's only if you eliminate all property taxes,

which no one's talking about that right now. If you wanted to eliminate just the squamino property tax, it would be about 14%. But again, I think you should broaden the base if we would even go that route. But again, I don't see the political will to do something like that. And we hadn't for many years, even though I think it's a good approach. I think it's one that should be considered at some point in the future if we had the political will. And so we said, well, what's another idea to do that? Well, another idea is to limit government spending.

It always starts with spending. I think even if we did a sales tax swap idea, you should also limit spending and use surplus to buy down the sales taxes over time if we ever went down that route. But how can you do it with just school M&O? Let's limit state spending to population and inflation. They made that change in the spending limit back in, was it SB 1361 or something like that, by Senator Hancock, where they made a spending limit based on population growth and inflation. And so that is now in law. We were talking about that for a while, but that's in law now. That's the consolidated general revenue. And then using 90% of money above that, so the revenue coming in above that, that surplus to buy down the

school M&O property tax. And using historical averages over the last decade of revenue growth, just general revenue growth and population inflation, and using that delta, that difference between the two, I calculated that within eight to 10 years, depending on some of the volatility, we could eliminate the school M&O property taxes. And that's without raising any other taxes, no 19% sales tax rate, no 14%, no other tax rates going up. That's just limiting spending and using surplus to buy that rate down to zero, which is one reason why compression is so important. If you start to narrow out that base with homestead exemptions, then that's going to move that eight to 10 years out to maybe 12 to 14 to 15 years, because you're not going to have as much of a,

the base to tax. And so it will mean less revenue that's coming in across the state and less property tax in this sense that, that, that we would have available to buy down over time. And so I think that this is another reason why the homestead exemption increasing and pushing a lot of that burden to businesses and other properties, because they're still going to spend the same amount, is actually going to hurt this process to get to elimination by compression. Lieutenant Governor, as you mentioned, was kind of railing against the idea of eliminating all property taxes. By the same token, a criticism of this approach is that what happens when the state doesn't have a massive budget surplus? Are school budgets going to have to automatically be cut, which I assume, you know,

you have thoughts on, but how do we, how would that plan, if this is implemented, approach an economic downturn? Yeah, it's a great question, Brad. I mean, what you would want to look at is historically when we've had downturns, how much general revenue has declined. And when you look at the great recession of 08-09, we got hit pretty hard. Even 01-03 recession in Texas got hit pretty hard. It was usually about a 7% decline in general revenue is kind of the worst that we've seen. And so let's say that it was a 7% decline in general revenue is kind of the worst that we've seen. And so let's say that it was a 7% decline. Well, in the rainy day fund, we're expected to have $27 billion in the rainy day fund.

And the cap on the rainy day fund is 10% of certain general revenue. All right. But that 10% cap is for a biennium. So if you take that for an annual amount, it's really a 20% cap. So we're about to have about 20% of general revenue in the rainy day fund. It's one reason why in the past, I've written that we should publish some papers looking at reducing the rainy day fund cap from 10% to 7%. Like why do we have so much money just sitting there? But there's a lot of money that's available. And so if there was a reduction in general revenue

from sales taxes primarily because there was a deep recession or something else, that's what the rainy day fund was created to do, was to cover unforeseen revenue shortfalls. And we could do that to make sure that this compression maintains. Because we do want to make sure that this is permanent. You don't want to compress the rate by 16 cents or whatever the rate ends up being, and then it come back up the next time. That's one reason why they had to include $5.3 billion in this budget to maintain property tax relief that happened in 2019, a little bit in 21. Because if not, then those rates would have come back up. And they would be like, all the voters would be like, why did you just raise my taxes? Well, I didn't. We just didn't fund it. And that's why $5.3

billion was for old relief. That's not new relief. The actual new relief we're talking about, it's about $12.3 billion. That's all that property owners would really feel of any new reduction in their tax bill or slower growth or whatever it's going to be is the $12 billion, not the $18 or whatever they're saying. Because that $5.3 billion is for old relief. That's what we'd have to do in the future. And so that's what I was planning into my model of looking at the buy down between eight to 10 years to eliminate the school and middle property taxes to use. I actually didn't see that we needed that because I didn't model in a recession, but let's say we did use the rainy day fund. You limit spending even more. I don't know that you'd cut public education. I don't model in a recession, but let's say we did use the rainy day fund. You limit spending

even more. I don't know that you'd cut public education. I don't know that the political will would be there to do that, but you would cut other areas of the budget. I mean, Talmadge Heflin and others did this back in 03 when they faced a $10 billion deficit without raising taxes or anything. This time there was an expected deficit back in 2021 and they ran in government spending. We can do it. There has to be the political will. It's always a back in 2021 and they ran in government spending. We could do it. There has to be the political will. It's always a spending problem. If we ran in spending, we could do a lot more and we could keep property taxes down.

And so I think that's another thing. Another thing to look at, Brad, is that there's a lot of excess revenue by school districts that's sitting on the side. And some of this has been used for operating budget. That makes sense because you need cash on hand. But then why do they have so much? I remember a couple of sessions ago, Chairman Huberty said that it was $20 billion.

I don't know what the exact amount is now, but that might be another place to say, look, if they're sitting on too much, they should be using that to keep these rates compressed as well. So I think there are plenty of opportunities to make sure that this is maintained. And the idea that we can't maintain it is overblown because I think a lot of politicians

don't want to limit spending. Okay. Well, I think that pretty much does it. Anything else you want to add on this topic? The last thing I would say is that I hope something gets done. This special session, the next special session, this is what's hurting Texans across the state. We've got an affordability crisis where there goes from housing,

rental units and other things. And this is the one area that Texas legislature doesn't control what Congress does with their excess spending and the Federal Reserve does with their excess printing that creates this inflationary pressure. What we can do is bring down the cost for taxpayers by compressing, reducing school M&O property taxes until we get to zero.

And I hope that we can get the largest property tax cut in history or the world, as Lieutenant Governor Dan Patrick has said. And look, I think that we need to have $21 billion of new relief, not 12.3, not 18, but it's $20 billion, $21 billion in new relief. Because if you take the 08, 09 amount of 14.2 billion, and you adjust it for the cost of living difference based on CPI, to have the same purchasing power that we could have today, that we had back then, it would need to be 21 billion. There's plenty of money on the sidelines right now. There's over $10 billion that's in excess revenue. The governor vetoed about a billion dollars. So I think we have over $2 billion underneath the spending limit. If you bust the spending limit, as someone who's a fiscal hawk, I think providing tax relief would be the reason to do that, not by growing government at anything else. And so I think that these are things that need to be considered. But at the end of the day, Brad, it's an extraordinary day to live in Texas to where

we are talking about $12 billion in property tax relief, which is more than the tax relief, I think, in almost every other state for sure. And I think if you provided all of it, you added up all the other tax relief that's happened across the country, I think this would be the most provided. And yes, that's about $6 billion per year. So you'd have to put in annual budget because a lot of states have annual budgets instead of the biennial budget that we have. But this is a massive amount of money. It's just tough to savor it though

because of the $33 billion surplus and other things that are going on. I would hopeful that we would have had the largest spending increase in Texas history with this budget. And I've done a lot of research on that. But I do, again, look, I'm always optimistic about Texas. And I think that we're going to be in a good position at the end of the

day. Let's just make it happen now. We've got a path. We can eliminate school and property taxes. And yes, we can do this. I think the governor is echoing that sentiment right there. The legislature, it looks like, is going to be back in Austin on Wednesday, it seems, for another go at this. So we'll see how it goes. There's a lot of pressure to get something across the finish line. And at some point, it will happen. It's just a matter of when. So Vance, thanks for joining us today. We appreciate it. Hey, thanks so much.