On Monday, September 11th, Plano City Council will vote on the first proposed property tax increase in five years. I’ll skip to the punchline–I support the increase. Read on to find out why.
The Era of the No-New-Revenue Rate
First, the background. As many of my readers know, I have been a strong champion of the No-New-Revenue Tax Rate (which is simply the rate that would keep the actual aggregate dollar amount of property taxes flat) for the past four years–every year I’ve had the privilege to serve on Plano City Council. However, I hadn’t necessarily intended to do so.
When I first ran for City Council in 2019, I promised to keep city property taxes flat for at least two years in a row in order to get a handle on the prior several years of precipitous tax increases. This was when the No-New-Revenue Rate was still called the “Effective Tax Rate”, a completely unintuitive term which only property tax wonks and Texas political activists were familiar with. It was renamed to the No-New-Revenue Rate in the 2019 legislative session in Austin as part of the significant property tax reform package of Senate Bill 2 (SB 2) and House Bill 3 (HB 3). This is important, so I’ll explain briefly.
The “Effective Tax Rate” wasn’t the only rate that was renamed. The “Rollback Rate” (also unintuitively named) was also renamed to the “Voter Approval Rate.” The “Rollback Rate” was the rate beyond which voters were allowed to petition to have an election to approve a proposed property tax increase. If the election were successful, then the tax rate would “roll back” to the “Rollback Rate”.
That rate was a massive 8 percent, meaning that local governments could increase the actual property tax burden in their jurisdiction (not just the rate) by up to 8 percent each year before the voters got to have a say. That seems like a ghastly number until you realize that the “Rollback Rate” was set back in 1981 when inflation was about 8 percent. The idea was that local government was permitted to keep pace with inflation (brand-new properties, improvements, and bonds are not part of the calculation), but if they wanted to raise taxes any more than that, the people would get the chance to vote on it.
However, inflation didn’t stay at those levels forever. Pretty soon, Paul Volcker slammed the brakes on the economy, the Reagan Economy soon kicked into gear, interest rates and inflation came way down and everybody moved on, but that 8 percent Rollback Rate continued lurking in the background. For the next 30 years or so nobody cared because for the most part property values roughly kept up with inflation. Most local governments adopted a set-it-and-forget-it property tax rate, and as property values steadily increased, so did local governments collect enough extra tax revenue to keep up with inflation.
Then in the early 2010s the Fracking Boom began and jobs–and with them, people–started flooding into Texas. Parallel to this, some states, notably California, started going off the rails and hemorrhaging businesses and residents. Texas was one of the biggest beneficiaries of the exodus, but this came with a commensurate increase in property values. Then, without an offsetting adjustment to the property tax rates which had been left alone for decades, tax increases started to outpace inflation. With tax increases up to 8 percent per year, the state legislature stepped in and in 2019 passed SB 2 and HB 3 and renamed the Rollback Rate to the Voter Approval Rate and reduced it from 8 percent to 3.5 percent for cities and counties, and 2.5 percent for school districts. Likewise, it renamed the Effective Tax Rate to the No-New-Revenue Rate. For good measure, it also no longer required a petition of those tax increase thresholds were met, but instead triggered an automatic election on the November ballot when voters would get to see a ballot item labeled “Property Tax Increase.”
Okay, so that explanation wasn’t that brief, but to be fair, I condensed four decades into four paragraphs. For more information about Texas Property Taxes, see my webinar “How Property Taxes Work in Texas” from 2020 with Rep. Matt Shaheen.
It’s critical to understand that because of the existence of inflation, the No-New-Revenue Rate is unsustainable in perpetuity. One or any of three things have to be done to counter inflation:
- Cut costs
- Add new property to the tax rolls (since those new taxpayers will be paying taxes)
- Pass bonds (since they’re not factored into the No New Revenue Rate and have explicit voter authorization already)
- Increase taxes
Ever since I was elected in 2019, we have worked to reduce costs, operating ever more efficiently. We have added some new property to the tax rolls, but not much. We also passed the largest bond package in city history in 2021. What we did not do for four years in a row was increase taxes.
In 2019 we had enough support to pass what was then still known as the Effective Tax Rate, and we kept property taxes flat. The next year, in 2020, the world turned upside down, and given the uncertainty, we once again had enough support to pass what was then called the No New Revenue Rate. With that vote, I had officially fulfilled all of my campaign promises. But we weren’t done.
The next year, in 2021, we not only passed the historic bond package, but inflation started to really climb and the threat of recession loomed. Given this, thinking about our citizens first, we once again passed the No New Revenue Rate. Then, one year later, in 2022, inflation peaked shortly before our budget and tax rate vote, and not wanting to hit our citizens twice, with a property tax increase on top of inflation, we once again adopted the No New Revenue Rate.
While it was a significant accomplishment, I was clear in my re-election campaign that I didn’t necessarily champion doing it again for a fifth year in a row unless we had a large infusion of cash. That’s because we had largely righted the ship.
Plano’s Property Tax Roller Coaster
The past four years represent a period of perhaps unparalleled fiscal responsibility in Plano’s history. But our budget and taxation have seen some significant pendulum swings, going back twenty years (which was as far back as we asked for data). Looking back at the past four years, it’s easy to say we were making up for the tax increases of the several years prior. But then we needed to look back further, to 2008-2009 during the great recession, when the city made significant cuts and property tax actually declined. In truth, we could go back to 2001 when world markets shook following 9/11, and before that to the dot-com bubble, and before that to the first Gulf War, and before that to the S&L crisis of the late 80s, and so on. But we won’t.
We asked city staff for data going back twenty years, and based on this both Councilman Ricciardelli and I did some math (full disclosure: while we align far more often than not, Councilman Ricciardelli doesn’t support as much of a tax increase as I do) and developed the chart at the top of this article tracking the increases in the budget, taxes (Homesteaded properties and non-), and inflation (both the Consumer Price Index and the Municipal Cost Index) since the 2003-2004 budget year.
Note that the city budget must contend with MCI (the Municipal Cost Index, the red line, which includes things like asphalt, which you don’t pick up at the grocery store, and has grown much more than CPI, the yellow line, over the past twenty years).
Also note that the fiscal year starts October 1, so each marker on the chart starts October 1 in the first year (e.g. FY 2003-2004 begins October 1, 2003)
I have several observations. First, the budget (green line) roughly kept up with MCI (red line) until 2008-2009, when the start of the fiscal year coincided with the bottom falling out of the economy. Notice here that the green line declined–our budget shrank, but both MCI and CPI (yellow line) continued to increase. Note also that property taxes fell. This is why our budget fell. In the subprime loan fallout, property values went wonky, and instead of jacking up our tax rate to compensate, we made do with less taxes.
Then, in 2010-2011 our budget started to grow again, with property taxes falling ever-so-slightly, but we started to have more new properties added to the tax rolls. Then in 2012-2013, taxes started to increase again, and then really started to climb in 2014-2015. Here, taxes also overtook CPI inflation and then started to really run away from it.
While property taxes were running away, our budget caught back up to MCI around 2016-2017. Property taxes started to level out a bit in 2018-2019, but then we pumped the brakes in 2019-2020 by adopting the Effective Tax Rate. You see that’s where the city budget also flattens.
Then, in 2020-2021, with the world gripped in COVID-mania, MCI skyrocketed, and the budget increased with all the money the Federal government was throwing around (which we’re now paying for with inflation).
Notice the giant leap in property taxes in 2021-2022? That was after nearly $400 million in bonds was approved in the spring of 2021. Remember, those aren’t factored into the No New Revenue Rate. Moreover, don’t ever let anyone tell you that passing a bond won’t affect your taxes. At best it means your tax burden won’t immediately increase. But you, the taxpayer, are on the hook to pay every penny in bonds, plus interest.
Additionally, the No-New-Revenue and Voter Approval Rate calculations are aggregate calculations of the taxable value of all properties across the entire city. This means that if your property value increased more than average, you’ll get a tax increase. If it increased less than average, you’ll get a tax cut. As I say, “Your mileage may vary.” Over the past few years, particularly since the pandemic, residential property values have increased more than commercial values, and so residential properties have experienced net tax increases. On top of this, the Plano Public Facility Corporation exercised a loophole in state law to unilaterally pull several properties off the tax rolls, resulting in several million dollars less revenue to the city. You, dear taxpayer, get to foot the bill for their actions.
Which brings us to today. MCI has continued to climb amid this horrendous inflation, and compensation for city staff has not kept up with other area cities. This creates an environment where we must balance paying for critical infrastructure costs with remaining competitive with what truly makes us the City of Excellence–our people.
The Proposed Tax Rate and Budget for 2023-2024
The City Manager’s Proposed Budget called for a tax rate of .4176 per $100 of taxable property valuation. We had originally assumed that the Voter Approval Rate would require a limit of .4060, but SB 2 allows local governments that pass tax rates less than the Voter Approval Rate to “bank” the increment for no more than three years toward future tax years. Since SB 2 has only been in effect for three years, and we haven’t entertained a tax increase during that time, we didn’t consider it. Long story short, the rate of .4176 is still within the definition of the Voter Approval Rate but represents a tax increase greater than 3.5 percent.
You may have seen that this is the largest proposed tax increase on homeowners in Plano’s history–just over 10 percent. This is true, but over the period where we’ve kept property taxes flat, CPI inflation has been 20 percent, so the tax increase over that time period is half of inflation.
The city did some research about a month ago to determine the average compensation increases in other area cities, and we are behind. Moreover, as I said last year when we passed a 3 percent across-the-board salary increase for city staff, a 3 percent increase in 9 percent inflation is a 6 percent pay cut. On top of this, we are in the middle of a compensation philosophy study to determine the right compensation philosophy to maintain excellent city services and remain highly competitive.
Ultimately, I gave support for the .4176 rate on the condition that the difference be put in a Compensation Fund which would provide immediate staff compensation increases and any other adjustments needed pending the outcome of the study. If we happen to not use it all, it would then be used for next year’s budget for compensation, thus reducing any potential tax increase next year.
New Budget and Tax Philosophy
I believe we’ve righted our budgetary ship after two tumultuous decades, but what’s to stop future councils from hopping back on the roller coaster? To that end, at the last meeting, I propose that this year we adopt a City of Plano Budget and Tax Philosophy focusing on several key things.
- We must always remember that the city has no money–it’s all the taxpayers’ money
- We must balance three things continually:
- Fiscal responsibility to our taxpayers
- Maintaining excellent city services and quality of life
- Inflationary pressures which may be different for the city and for our citizens
- We must take a multi-year view of our budget and tax rate. At present, I think I’m in favor of looking back four years, and ahead three years
- As a mature city, we have no need to fund growth via bonds. As such, we should operationalize our maintenance and issue bonds only for large renovations or the few new projects we can expect to capitalize the costs
If we can preserve a spirit of fiscal responsibility, then it should be that spirit that oversees future budgets and tax rates, long after we’re all dead. But we can’t preserve it without We the People to remain ever-watchful and hold us accountable.