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Homestead exemption could leave $36 million budget hole to fill

Wednesday, August 6, 2014 by Tyler Whitson

A homestead tax exemption as a percentage of appraised value on homeowners could potentially blow a $36 million hole in the next city budget, though it would also put close to $200 back in most taxpayers’ pockets, according to a briefing Tuesday at the Austin City Council’s weekly work session.

The city Financial Department’s analysis found that a 20 percent homestead exemption, applied to projected FY2015-16 tax revenues of $316.8 million, showed a $35.6 million loss compared to a $352.5 million revenue projection with no homestead tax exemption. Staff said that they valued the homestead exemption based on FY 2014 property values using the proposed tax rate of 48.09 cents per $100 of taxable value.

The hypothetical 20 percent homestead exemption would yield an annual savings of $189 for owners of homes at the median value of $196,500. Mayoral candidate Steve Adler and others have raised the idea of a homestead tax exemption as a campaign issue. (See Austin Monitor, Aug. 5)

Deputy Chief Financial Officer Ed Van Eenoo delivered the presentation in response to a Council resolution passed June 26, which asked City Manager Marc Ott to have staff perform an analysis on the topic and present the findings. Ott also sent a memorandum to Council July 30 in advance of its first budget work session.

Van Eenoo’s presentation stressed that he is basing the figures on the currently available tax rate and certified property values and that the actual revenue loss would vary depending on actual 2015-16 figures. He also noted that if the city put an exemption in place in 2015, Council would have to decide on it before July 1 of that year.

According to the presentation, taxing units within Texasincluding cities, counties, school districts and special districts — must adhere to various requirements when putting tax exemptions in place. Those include a maximum exemption of 20 percent and a minimum exemption of $5,000, regardless of property value or percentage level of exemption. Homeowners, in addition, must be individuals — not corporations or other entities — that use the property as a primary residence.

The minimum, Van Eenoo said, “really only comes into effect at very small percentage exemptions.” He illustrated this with a hypothetical example. “If you were to look at somebody like Austin Community College, where they have a 1 percent exemption, for homes less than $500,000 it does trigger this floor,” he said. “A $100,000 home at a 1 percent exemption would normally get a $1,000 exemption, but this says you have to get at least $5,000.”

Van Eenoo contrasted the 20 percent projection, which he described as being at the “higher end” of the spectrum, with a low-end measure. If the Council were to put in place a very small percentage exemption that triggered the $5,000 floor in fiscal year 2015-16, he said, the analysis projects a $3.1 million drop in revenue and an annual savings of $24.05 to the owner of a median-valued home.

Council members’ primary concern following the presentation was how the city would make up the lost revenue, whether by increasing the tax rate, cutting spending or a combination of both.

Council Member Kathie Tovo asked Van Eenoo if the Council would need to increase tax rate in order to compensate for a 20 percent homestead exemption. “Basically, a four penny increase in the tax rate would get you the roughly $36 million back,” he said.

Van Eenoo went on to point out that, if Council chose that path, it could potentially result in a rollback election. “That’s three pennies beyond the state-defined rollback calculations,” he said. “You would open yourself up to the risk of a rollback election and the electorate choosing to roll that tax rate back to the rollback level.”

Eventually, the increased burdens to commercial property owners in this scenario could affect renters. Citing concerns expressed by Mayor Pro Tem Cheryl Cole about this possibility, Van Eenoo said that though an official projection had not been made, “it’s probably safe to say that those increased costs to the landlord would ultimately be passed on to renters.”

Council members also discussed the fairness of the homestead tax exemption. Council Member Laura Morrison expressed concerns that “higher-valued properties get the most benefit” due to the “regressive nature” of the tax.

Morrison expressed interest in the idea of an exemption set at a certain percentage point, but limited by a cap. “That way you could say, ‘I want a 20 percent exemption, but no greater than $50,000 or $25,000 or something like that,'” she said. “That way you can make sure that you’re not getting such a lion’s share of benefit for the really high cost, high valued properties.”

A homestead tax exemption as a percentage of appraised value on homeowners could potentially blow a $36 million hole in the next city budget, though it would put close to $200 back in taxpayers’ pockets, according to a staff briefing Tuesday at the Austin City Council’s weekly work session.

The analysis found that a 20 percent homestead exemption, applied to projected FY2015-16 tax revenues of $316.8 million,  showed a loss of $35.6 million compared to a $352.5 million revenue projection with no homestead tax exemption.  City staff said that value of the homestead exemption was based on FY 2014 property values using the proposed tax rate of 48.09 cents per $100 of taxable value.

The hypothetical 20 percent homestead exemption would yield an annual savings of $189 for owners of homes at the median value of $196,500. The idea for a homestead exemption has been raised as a campaign issue by mayoral candidate Steve Adler and others. (See Austin Monitor, Aug. 5)

Deputy Chief Financial Officer Ed Van Eenoo delivered the presentation in response to a Council resolution passed June 26, which asked the City Manager to perform an analysis on the topic and present the findings.  A memorandum was also provided to Council on July 30, in advance of its first budget work session.

Van Eenoo’s presentation stressed that the figures are based on currently available tax rate and certified property values and that the actual revenue loss would vary depending on actual 2015-16 figures. He also noted that, if an exemption were to be put in place in 2015, it would have to be decided before July 1 of that year.

According to the presentation, taxing units within the State of Texas — including cities, counties, school districts and special districts — must adhere to various requirements when putting tax exemptions in place. Those include a maximum exemption of 20 percent and a minimum exemption of $5,000, regardless of property value or percentage level of exemption. Homeowners, in addition, must be individuals — not corporations or other entities — that use the property as a primary residence.

The minimum, Van Eenoo said, “really only comes into effect at very small percentage exemptions.” He illustrated this with a hypothetical example. “If you were to look at somebody like Austin Community College, where they have a 1 percent exemption, for homes less than $500,000 it does trigger this floor,” he said. “A $100,000 home at a 1 percent exemption would normally get a $1,000 exemption, but this says you have to get at least $5,000.”

Van Eenoo contrasted the 20 percent projection, which he described as being at the “higher end” of the spectrum, with a low end measure. If the council were to put in place a very small percentage exemption that triggered the $5,000 floor in fiscal year 2015-16, he said, the analysis projects a $3.1 million drop in revenue and an annual savings of $24.05 to the owner of a median-valued home.

Council members’ primary concern following the presentation was how the city would make up the lost revenue, whether by increasing the tax rate, cutting spending or a combination of both.

Council Member Kathie Tovo asked Van Eenoo if said that the tax rate would need to be increased  in order to compensate for a 20 percent homestead exemption. “Basically, a four penny increase in the tax rate would get you the roughly $36 million back,” he said.

Van Eenoo went on to point out that, if Council chose that path, it could potentially result in a rollback election. “That’s three pennies beyond the state-defined rollback calculations,” he said. “You would open yourself up to the risk of a rollback election and the electorate choosing to roll that tax rate back to the rollback level.”

In the scenario of a proportionally increased tax rate, the net savings to the typical homeowner would be reduced, Van Eenoo said, to $125.64 instead of $189.

He went on to note that commercial properties would also shoulder some of the tax burden. Citing the median home value, he explained that commercial property owners would have to pay an additional $79.19 for every $196,500 of commercial value they own.

Eventually, the increased burdens to commercial property owners in this scenario could affect renters. Citing concerns expressed by Mayor Pro Tem Cheryl Cole about this possibility, Van Eenoo said that though an official projection had not been made, “it’s probably safe to say that those increased costs to the landlord would ultimately be passed on to renters.”

Council members also discussed the fairness of the homestead tax exemption. Council Member Laura Morrison expressed concerns that “higher-valued properties get the most benefit” due to the “regressive nature” of the tax.

Morrison expressed interest in the idea of an exemption set at a certain percentage point, but limited by a cap. “That way you could say, ‘I want a 20 percent exemption, but no greater than $50,000 or $25,000 or something like that,'” she said. “That way you can make sure that you’re not getting such a lion’s share of benefit for the really high cost, high valued properties.”

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