Not so fast on eliminating the property tax in Texas

I recently spent a bit of time on social media and spotted a story written by Erin Anderson of Empower Texas / Texas Scorecard. Ms. Anderson wrote a post that there is a push going on in Austin, spearheaded by the Texas Public Policy Foundation, to gradually eliminate the property tax in Texas by the year 2033.

Many friends and acquaintances whom I know from politics have been quite active in trying to eliminate the property tax in this state. They have often expressed the same sentiment that the TPPF has about property taxes, namely that property taxes are an affront to property rights. The argument is straightforward: that property taxes are an affront to the creed of Life, Liberty, and Property (or the pursuit of happiness), because the imposition of taxes on personal property is akin to making property owners renters. Property and home owners will never really be secure in owning the property, because local governments in Texas will always have a gun at their disposal and everyone’s property will be encumbered with a tax imposed on the property that has to be paid to the government on an annual basis. If you fail to pay the tax on time, you will be first assessed monetary penalties which increase the amount of tax you have to pay. If you fail to pay the tax altogether, the amount you owe could well build up to the point where local governments will put a lien on your property or even seize your property outright. That dynamic is an affront to the ideal that the job of government is to protect your property and your property rights – not seize your property from you.

Texas of course is a huge state. We have some 268,000 square miles of land, and it’s some 850 miles east to west from Beaumont to El Paso. There’s lots of room to accommodate millions of people here. For all of the history of Texas up until circa 2005-10 or so, land and property have been cheap. That fact has been a huge draw for many, and it has been a source of competitive advantage for Texas. Those facts have, for generations, made the overall property tax regime tolerable for most. However, starting around 2010 or so, property values and housing costs started climbing at a considerably faster rate than previously, something that I wrote about over three years ago right here. I speculated back then that such factors as increasing population pressures and the advent of fracking were big factors in driving up housing and property values in Texas. Since then, I’ve also come to think that the macroeconomic environment of falling interest rates over time has also come to play a role. To put it bluntly, potential property buyers, most of whom are going to be borrowing money to make a land or housing purchase, can afford to borrow much more money at lower rates to acquire property. When combined with increased competition for land and housing and a booming state economy from a revived oil and gas industry, the conditions for rising property and housing values are created.

That in of itself is an issue, but then there’s that pesky old issue that local governments are heavily financed via property taxes. I myself have no fewer than eight local governmental entities in Harris County that have their hands in my pocket via the property tax. Typically, after factoring in the exemptions and whatnot, Texas residents pay somewhere around 2% of the value of their properties per year in property taxes. From there, it’s easy to see in an era of rising property and housing costs why property taxes have continuously been on the legislative agenda over the past 10 years in Texas.

I will say here that if the only consideration with regards to eliminating the property tax were ideological, that the concept that Texans aren’t secure in their property due to the property tax, I would not necessarily be opposed to getting rid of the property tax and replacing it with some kind of tax on commerce – whether a VAT or a sales tax.

But…it isn’t.

The story of California and Proposition 13

In 1978, a fabled event in American state government history occurred. That year, activists in California, fed up with rising real estate prices and their attendant property taxes, pushed through Proposition 13. California has initiatives and referenda in their state constitution, something that Texas does not have. In Prop 13, the state constitution of California was amended such that the property tax rate on property in California may not exceed 1% of the value of the property. Property tax increases were limited to a maximum of 2% per year, reassessments are prohibited unless ownership of the property changes hands, or if the property is new construction.

Now, many people grouse much about many things about California these days. The shriek about how Lefties have allowed crime to get out of control. The gripe about how homelessness and other social ills have ruined California, not to mention that Hollywood is chock full of clueless, left-leaning movie stars who have a proclivity for thumbing their noses and preaching about how unenlightened the grubby peasantry are about the world.

However, there is another aspect of life that has unfolded in California over the 40+ years since Proposition 13 has passed that seems to have been overlooked by many. Namely, all the way up through the 1960s and 1970s, California (and indeed most of the United States) had a property-rights friendly, pro-growth, and pro-development regime. Real estate developers could pretty much assemble large tracks of land at the outer fringes of urban areas, and then punch out subdivisions composed of hundreds (or even thousands) of single family homes at low cost. Suburbanization (or sprawl to its detractors), with strip centers, two-story condo or apartment blocks, shopping malls, and other low density urban development went up all over America.

However, starting in the 1970s, there started to be pushback against suburbanization. This happened in some areas of the country to a much greater degree than in others. In Texas, the effects of this were rather weak, if there were any. However,in  other areas of the United States, including the West Coast states of Washington, Oregon, and California, urbanites started to adopt NIMBY type attitudes towards new development, pushing through zoning ordinances that steadily, but continuously, put an ever growing noose around any new development. Furthermore, restrictions on where developers could build, and even urban growth boundaries were imposed, greatly restricting the amount of land that was available for accommodating population growth. All the same, people continued to move to California in droves, and population pressures, when combined with this anti-growth, anti-development agenda, have had the cumulative effect of driving property prices and the cost of housing through the roof. Current average prices for home in the Los Angeles area are around $915,000 for a single family home. In San Francisco, the price for a home is just under $1,500,000! In comparison, housing prices in Houston and most other Texas cities, even after recent price increases, are still in the $300,000 range.

In recent years, there has been a counter-movement of residents with YIMBY-type attitudes towards development who have been trying to reverse the ills of the last 40 years. Recently, the California legislature sent governor Gavin Newsom a bill, which he signed, that would override local ordinances to get densification infill development to occur. That is a good first step. However, most Americans still aspire to live in single-family homes. There is some market for some demographic groups for dense urban living, but based upon Houston’s experience over the past 30 years, the vast majority still want to live in low-density new development, and to accommodate that, Californians will have to undo urban growth boundaries and open up new land for development.

This brings me to what I’m worried about. All of these political and economic trends accelerated after the passing of Proposition 13 in California. My theory – and my fear – is that if property taxes are eliminated in Texas, sooner or later people in Texas, particularly in urban centers, will start to develop the same anti-development, anti-growth mentality that has taken hold on the West Coast and elsewhere. They will be emboldened by the fact that if they can succeed politically in legally making urban development more difficult and put land off limits to development, property values will go through the roof, and they won’t be encumbered with the accompanying rise in property taxes that people are shrieking about already. In short, my belief is that the imposition of property taxes, as awful as they are, help to promote an accommodating growth agenda by creating incentives to keep new supplies of housing coming online and putting a lid on property and housing prices. This keeps housing affordable for everyone.

And this is a really big deal. The population in Texas has grown by 9 million over the past 20 years – roughly 18% of all of America’s population growth over the past 20 years. During the 2008-09 economic crisis and afterwards, Texas effectively became the shock absorber for the rest of the country, with hordes of people coming looking for hope and opportunity. If an anti-development, anti-growth mentality takes hold, that aspect of life in Houston (and Texas) may well come to an end. If you don’t think this is a big deal, you should bear in mind how many companies and residents have been fleeing California, and how many California residents want to leave. And, the biggest single factor for why California residents want to leave is because of the cost of housing.

Currently the product and cost bundle of housing in Houston (and Texas) is something like this: Rents and mortgages are, for many, in the $1,000 – $2,000 per month range, with owners of $300,000 homes paying some $4,000 – $6,000 a year in property taxes. Yes, that is enough to get many people mad, but that’s nothing compared to California residents paying low property taxes, but paying $3,000 – $4,000 per month in rents for equivalent housing. My worry is that if Texas removes the property tax, the dynamic in this state will change and may well set Texas going down the road of California. A political dynamic may take hold where incumbent property owners could see that they could capture property value increases via political means of limiting land for development, and that would be disastrous to overall housing affordability. Another aspect of this new dynamic is that the process by which all this unfolded in California and elsewhere did not happen overnight. Rather, this all unfolded over a period of 30 years of more, making it both more difficult to see it as it happened, and more difficult to undo it once the anti-development, anti-growth dynamic became entrenched.

I could well be wrong about all this. It could be that the pro-growth dynamic will continue even after eliminating property taxes and switching over to taxes on commerce to fund government. Yet my thoughts about the darker side of human nature – and the fact that it has already happened elsewhere before – tell me otherwise, and I’d rather stick with the Devil we know.