Council weighs homestead exemption equity
Thursday, May 14, 2015 by Tyler Whitson
City Council is facing an array of difficult choices as it attempts to balance potential increases in the city’s homestead exemption tax with its upcoming budget needs. Following a Wednesday budget work session, Council members can add possible impacts on renters to the equation.
In addition to issues involving renters — who comprise 55 percent of Austin residents — Council learned more about the ways in which moving forward with various alternatives might affect city services and residents of different districts. These include multiyear implementation plans.
Though comments from Council members varied, it was clear they would need more time to come to a consensus.
Council Member Ann Kitchen remarked that she felt as if she were echoing most of her colleagues when she said, “I do think we need to do something this time. I’m not certain yet what that is.”
As it did at its last session May 6, Council started with four major implementation scenarios for this tax year, using projected and hypothetical tax rates for the upcoming 2015-2016 fiscal year, which starts in October. These have included impacts on the city budget and non-homestead properties.
Three of these scenarios include setting a 20 percent exemption at either the forecast tax rate, the appropriate rollback tax rate or a tax rate above the rollback rate that would even out the costs of the exemption. The fourth is setting a 6 percent exemption at the rollback tax rate.
The ever-present fifth option is making no change to the current 0.01 percent exemption, which effectively sets a $5,000 flat exemption for all homeowners at the forecast rate, the projected rate needed to balance the budget.
Budget Office staff has calculated the forecast rate for the coming fiscal year at 47.5 cents per $100 of valuation, which would be a decrease from the current rate of 48.09 cents.
If Council sets a tax rate above the rollback rate, it would trigger an election for voter approval, making it an unlikely choice.
Using what is believed to be a representative sample of apartment complexes, staff calculated the projected impact of each option on the building owners resulting from a shift in their tax burden, which could then be passed on to renters. Staff went through a similar process for rented single-family homes.
Implementing a 20 percent exemption at the forecast rate would cost the city budget $32.5 million, reduce the median homestead tax burden by $216 per year and not shift any burden to renters because there would be no property tax increase.
Setting a 20 percent exemption at the rollback rate of 48.86 cents would cost the city budget $19.2 million, reduce the median homestead tax burden by $191 per year and potentially increase the rent of the average apartment by $11.59 per year and the average single-family home by $29.28 per year.
If Council selects one of the options that would reduce revenue for the city, it will likely have to cut the budget and certain services. To prepare for this possible task, Council members included a request for potential cuts in the February resolution that started the ball rolling on the exemption data-gathering process.
City Manager Marc Ott sent a report to Mayor Steve Adler and Council on Tuesday that identifies more than $23.6 million in potential service reductions and revenue enhancements as well as more than 156 cuts in full-time equivalent staff positions.
“Departments were asked to identify reductions with the least impact possible to core services,” Ott wrote in an accompanying memo. “This report is one tool, in addition to tax rate changes, for consideration in balancing overall city needs and addressing the revenue loss associated with implementing a homestead tax exemption.”
There are other options that would not necessarily reduce revenues for the city.
Though Council would probably not choose to do so because it exceeds the rollback rate, setting a 20 percent exemption at 50.83 cents would cost the city budget nothing, decrease the median homestead tax burden by $155 per year and potentially increase the rent of the average apartment by $28.39 per year and the average single-family home by $71.68.
In what could be the first step of a phased-in approach, setting a 6 percent exemption at the rollback rate of 48.24 cents would cost the city budget nothing, reduce the median homestead tax burden by $49 per year and potentially increase the rent of the average apartment by $6.31 per year and the average single-family home by $15.93 per year.
Deputy Chief Financial Officer Ed Van Eenoo referred to this as a “revenue neutral” option, because it is the highest possible exemption that Council could implement without cutting the budget or exceeding the rollback rate.
Going further, staff projected the costs of implementing a 20 percent exemption over two and four years, starting with the proposed 6 percent exemption in the coming fiscal year.
A two-year rollout would cost the city budget $19.1 million in fiscal year 2016-2017 when it reaches 20 percent.
A four-year rollout would have a smoother impact, costing the city budget $5.6 million in fiscal year 2016-2017 when it reaches 11 percent, $2.8 million the following fiscal year when it reaches 16 percent and $5.8 million in its final year.
To better illustrate how the costs and benefits of the exemption would spread across the city, Van Eenoo provided an updated set of homestead statistics for each district. The new data, he explained, includes City of Austin properties in Williamson County, which were not part of the last presentation.
Districts 8 and 10 tie for having the highest proportion of the city’s roughly 131,000 homesteads at 14.3 percent, with District 4 having the smallest proportion at 5.2 percent.
The citywide median homestead value is about $227,000. District 10 represents the high end of the spectrum with a median of roughly $455,000, while District 2 represents the low end with a median of approximately $111,000.
Staff also broke down the number of residents in each district by whether they own or rent, using 2013 data demonstrating that those in higher income brackets are more likely to own their homes.
District 8 has the most homeowners at 68 percent, while District 3 has the least at 26 percent.
District 9, which encompasses much of the city’s urban core, holds a unique position in that it has the second-lowest percentage of homeowners at 28 percent, but the second-highest median homestead value at about $377,000.
These data indicate that increasing the exemption from where it currently stands could have significantly different impacts on residents of different districts.
Mayor Pro Tem Kathie Tovo, who represents District 9, said she wants to learn more about the potential costs to renters in relation to the potential benefit to homeowners.
Adler expanded on this request and emphasized the need to look further into the district issue. “We’re going to see what the impact is by district, because somebody is obviously paying for this,” he said.
In order to increase the exemption for this year’s property taxes, Council will have to choose a path forward by June 30, though staff has recommended action by June 4 and continued discussion this coming Wednesday.
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