Do Property Tax Caps Help or Hurt Communities?

In June, Texas governor Greg Abbott and assorted dignitaries met at an Austin restaurant, Wally's Burger Express, to sign Texas Senate Bill 2. The new law — known colloquially as “SB2” — requires local governments to hold an election if they want to raise property taxes more than 3.5% over the previous year. According to Jordan Clark and Kevin Shepherd of Verdunity, a Dallas-based community consulting organization (and longtime friends of Strong Towns), that makes Texas the "latest state to pass or amend legislation capping the amount cities' revenue from property taxes can increase year to year."

Clark and Shepherd put SB2 in context in the most recent episode of the Go Cultivate! podcast. (This is one of our favorite podcasts, by the way.) They also explore the question, "Do property tax caps help or hurt communities?" 

While the rationale for property tax caps sounds noble — “let's keep homeowners and business owners from getting priced out of their homes and businesses” — these caps often lead to unintended consequences. "Unintended consequences," but perhaps not "unanticipated," because as Clark and Shepherd discuss, lawmakers have plenty of opportunities to see how property tax cap laws are playing out elsewhere. Forty-four states have some version of a property tax cap on the books — the most well-known of which is California's Prop 13, now 41 years old.

As communities grow, so do their service costs and liabilities (14:30). These include street replacement, libraries, police and fire departments, and rapidly escalating education costs. To close the revenue gap, cities and counties become overly dependent on state and federal funds, which are fickle; and fees, fines and sales taxes, which disproportionately affect the poor. Revenue gaps are one reason Texas cities and counties were almost unanimously against SB2.

But revenue gaps aren't the only consequence. Property tax caps pressure older residents to stay in their homes rather than downsize, which in turn puts pressure on the housing market, especially in fast-growth cities like those in Texas and California. They make local governments more vulnerable to outside forces, something we talk about often here at Strong Towns.

At their worst, property tax caps also lead to some truly absurd situations, as in Anaheim, California. Disneyland, because it has remained under the same ownership for decades, pays one-eighth as much property tax per square foot than does the average California homeowner.

Forty years of property tax caps in California and elsewhere have made cities more fragile, and have encouraged them to make decisions that aren’t in the interest of either their current residents or their future resilience (27:00). Shepherd provides an example: "When you look at the situation that all these [outcomes] combined have put a city into, in terms of generating revenue now, a local government in California is better off if they zone the property to attract a car dealership or other high sales tax-generating businesses that might bring in sales tax revenue, but don't help with quality of life or other things in the community."

Clark and Shepherd go on to discuss what communities should do in the meantime, both to change property tax caps in the long run (36:45) and to better exist under the current structure (39:00).

Maybe Texas didn't learn from California, but we can hope that other states will learn from Texas. And we can all learn from this great podcast episode.