Noteware: Eliminating Prop 1 will not solve, and may exacerbate, Houston’s systemic fiscal problems

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To address the City of Houston’s unsustainable fiscal trajectory, several current (and aspiring) elected officials have proposed increasing property taxes. They seem to view the City’s chronic deficits of more than a decade as a revenue problem, not a spending problem, despite record levels of revenues most years. Their solution: get even more revenue! To do so, however, will require repealing the “cap” on property tax revenues known as Proposition 1 (or “Prop 1”), a charter amendment approved by voters in 2004. That “solution” is likely to be problematic, even counterproductive, for a host of reasons.

First, citizens voted for Prop 1 overwhelmingly, citywide. The referendum, which passed in every City Council district, limits the growth of the City’s property tax revenue from year to year to the lower of the sum of the growth rates of inflation and population, or 4.5%. In 2006, voters approved Proposition H (“Prop H”), which permits the City to raise an additional $90 million beyond the Prop 1 limit to fund public safety. These charter amendments reflect the popular will. Why would any city official seek to defy or overturn the expressed desire of the people for the City to live within reasonable means?

Second, as I have shown in previous articles, the City’s official financial statements show that even though the City has been enjoying record revenues from property taxes most years, City expenses have grown even more quickly than the record revenues, creating deficits every year since 2002! Given the citizens’ support of Prop 1 and Prop H, why wouldn’t City leaders want to reduce expense levels to correspond with the (record) revenues? Instead, as I have also shown previously, City expenses per capita have actually grown a whopping 46% over the past twelve years; in other words, the City is spending much more as City operations become progressively less efficient. Shouldn’t City leaders focus on the City’s spending and productivity problems?

Third, proponents of increasing property tax revenues should consider who will actually be paying the higher taxes. Property tax revenues, of course, are a product of two factors: the assessed valuation of a property, and the property tax rate. In recent years, increases in the values of residential and commercial properties in only certain parts of the City have driven record-high property tax collections for the City overall. For property tax revenues to continue to increase, property values must continue to rise and/or tax rates must be raised. Will property values continue to rise (especially if energy prices continue downward and/or remain depressed), or are City leaders proposing to boost property tax rates, despite indications (in the form of record property tax protests) that taxpayers are already straining to keep up?

Fourth, one important reason for skepticism regarding proposals to eliminate the modest taxpayer protections of Prop 1 is that the City’s own budget expert, Finance Director Kelly Dowe, has concluded that “lifting or modifying the property tax cap reduces, but does not eliminate the (budget) gap.” Mr. Dowe projects that over the next five years, the City’s budget deficit will range from approximately $150 million to $200 million. Using property tax revenues of ~$1 billion for this fiscal year as a baseline, closing the budget gap would require increasing property taxes another 15% to 20% — on top of the valuation increases of roughly 10% per year that many taxpayers have been experiencing!

Previously, I described the rapid growth of the Houston region and the relative stagnation of the City of Houston proper. Consider the impact of the massive property tax increase described in the preceding paragraph should Prop 1 be repealed: the City would become even LESS attractive than the suburbs and exurbs for residential and commercial purposes. Indeed, just a few years of accelerating suburban flight in response to repeal of Prop 1 and skyrocketing property taxes could lead, somewhat counterintuitively, to diminished property tax revenues for the City!

A version of this article appeared in the Houston Business Journal on January 21, 2015

About Jim Noteware 18 Articles
Jim Noteware is a Houston-based real estate developer, focusing on suburban master-planned and urban infill communities. He also specializes in the turnaround of distressed properties, portfolios and organizations. He has served two big-city mayors, in Houston and Washington, D.C., working to improve the performance of large troubled public agencies.