By Deborah Goonan, Independent American Communities
As Texans debate how to rein in high property taxes, many homeowners struggle to keep up with rising condo and HOA fees as well.
But several recent articles on the subject of property tax reform fail to acknowledge that the bulk of HOA and condo assessments. Association-governed community fees are, in essence, property taxes due and payable to a fourth layer of government.
Think about it. If you live in a planned community under governance of a homeowners’ association, you’re paying fees or assessments to provide many local services.
Your HOA almost always pays de facto tax dollars in the form of fees for essential services such as storm water management and neighborhood security. You might also be paying to maintain private roads and street lights.
And what if your community boasts “private” amenities such as parks, tot lots, walking trails, recreational lakes, club houses, swimming pools, or sports facilities.? Those are essentially taxable non-essential services that you must pay for, whether you use them or not.
If you own a townhouse or condominium property, a portion of your condo or HOA fees pays for home maintenance in common.
But even though you’re sharing housing costs with other owners, it’s a mistake to think you’ll spend less money maintaining a condo than a single family home without the HOA governance.
Many condo and townhouse owners discover this fact within a few years after they downsize for retirement.
How did we get here?
Property tax revolt
Roughly 40 years ago, a majority of homeowners in the U.S. were paying higher and higher property taxes as real estate values continued to rise.
In response, voters put pressure on local governments to control increases in property taxes. When that didn’t work, state Legislators enacted laws to limit annual property tax increases.
However, Texas (and other states) did not increase the state’s share of tax revenue to help local governments offset tighter budgets for public education, police, fire protection and other local services.
So when developers and investors from the real estate industry promised to cover the cost of new development — and ongoing maintenance and code enforcement — through mandatory homeowners’s associations, city and county governments welcomed the cash cow.
And why wouldn’t they?
Texans paying more tax than ever
For the past three to four decades, local governments have been able to collect property taxes at the same rate for newer homes, while providing a lower level of public service.
And when that didn’t generate enough revenue for economic development and services, Texas Legislature enabled County governments to create Special Tax Districts to fund additional infrastructure (such as water utiities) and other local amenities.
These days, homeowners in Texas and other high growth states typically pay taxes to school districts, cities, counties, and one or more Special Districts.
And, on top of these obvious tax bills, the majority of homeowners also pay HOA or condo fees. Homeowners are double taxed, to some extent, for public services shifted to their private communities.
No wonder housing is so unaffordable, even for homeowners who have paid off their mortgage.
The issues are summarized well by Dallas News.
‘Skyrocketing property taxes’ are a problem for many Texans, but will Gov. Abbott’s plan help?
November 21, 2018
Rebekah Allen, Texas government reporter
AUSTIN — After Becky Hunter’s husband died in 2012, the combination of grief and having to maintain a house proved too much for her and her daughter to handle.
So they sold their home of 16 years and moved to a condo in Richardson. Hunter, 59, expected their bills would be minimal because the condo’s mortgage was paid off.
But the property taxes and homeowner’s association fees, totaling more than $1,000 a month, caught her by surprise.
They sold the condo, and now she and her daughter are stuffed into a rental apartment.
“We didn’t want to do that, but we had to,” Hunter said. “Not everyone can afford that.”
Hunter’s story and others like it are why state lawmakers, primarily conservative ones, are vowing to overhaul property taxes in the upcoming legislative session that starts Jan. 8.
As referenced in the article above and below, here are some highlights of Governor Abbott’s ambitious plan:
- 2.5 percent cap on annual property tax revenue growth.
- Tax increases exceeding the cap, as well as taking on new debt, would require the approval of two-thirds of voters.
- No more unfunded state mandates on local governments.
It’s important to note that Texas has no state income tax, which means that the state must rely more heavily on other sources of revenue such as sales tax and property tax.
Greg Abbott: I have a plan to rein in property taxes
Greg Abbott, Contributor
Owning a home or starting a business is part of the American dream. However, for many Texans, their dream is coming face-to-face with the harsh reality of skyrocketing property taxes.
The issue of rising property taxes has plagued our state for decades. Since 1997, property tax collections in Texas have increased by 195 percent.
Across Dallas-Fort Worth, and in many parts of Texas, homeowners are at risk of being forced out of homes they have lived in for years, young families who are just starting out are unable to afford their first homes, and businesses are unable to grow because of high property taxes.
The Texas Public Policy Foundation, a non-partisan Think Tank, is backing similar property tax reform measures, although not as drastic as the Governor’s proposal.
Their proposed plan would increase the share of general state revenue contributed to local governments, in order to eliminate school property taxes. (But not other local property taxes)
In order for the plan to work, the state budget for Texas would allocate a much higher share to education funding.
Eliminating School M&O Property Tax in Texas
By Vance Ginn, Ph.D.|November 13, 2018
School district M&O property tax collects about $25 billion in 2018 or $51.3 billion in 2018-19, making up nearly one- half of the heavy property tax burden Texans face.
Historical state general revenue-related revenue (GRR) growth has averaged 10.08 percent every biennium since 2004-05.
Future state spending increases will be limited to 4 percent per biennium. Ninety percent of the surplus between future GRR growth and the spending growth limit will be used to eliminate the school M&O property tax, with the state increasing state education funding each year to gradually replace the M&O portion of each local school district’s prop- erty tax revenue.
School districts will set their tax rate each year to reduce property tax revenue by the amount of the state’s replacement funding. Districts can only exceed this rate with the approval of more than 50 percent of voters in an election with at least a 20 percent turnout. Excess revenue raised by the vote will be recaptured by the state.
Increases in city, county, and special purpose district property tax revenue will be limited to 2.5 percent per year to keep local governments from raising taxes to fill the gap caused by lower school district taxes. The limit can be exceed- ed with the approval of 50 percent of voters in an election with at least a 20 percent turnout.
If the historical rate of GRR growth holds, Texas should be able to eliminate the property tax in 11 years. If GRR growth is lower, then it will take longer.
Is it possible to provide property tax relief?
Now let’s get back to the issue of hidden double taxation by way of HOA fees.
Up until a few years ago, industry trade groups such as Community Associations Institute (CAI) praised common interest community associations as more efficient and more democratic than local governments.
As you can see from this archived publication from 2011-2012,* CAI proclaimed that privatization of public functions saved local governments money.
The publication also boasts that association-governed communities are more efficient at delivering services, and that they make housing more affordable.
But here we are less than a decade later, and virtually every political and economic expert agrees that property taxes and HOA fees and assessments are way out of control.
So will any of these property tax proposals provide tax relief for homeowners?
That’s entirely dependent on how far state policymakers can take fiscal responsibility, what budget cuts the state Legislature is willing to make, and how much tax revenue the state can generate from sources other than property tax.
If the state falls short on any of its financial goals, what will happen?
Homeowners will probably still make up for the budget gap.
After all, if Texas state government severely limits property tax increases, without increasing its contributions to cover the gap, it’s likely that local governments will transfer even more costs of local services to homeowners by way of their HOAs.
And, in the end, that could end up costing Texas homeowners even more than they’re paying now.
*(based upon CAI statistical estimate of 320,000 community associations in the U.S. at that time)