The following is an excerpt from a Focus Report provided by the House Research Organization. To view the report in full, go to http://www.hro.house.state.tx.us/focus/major81.pdf
Comptroller property value study and appraisal district review
HB 8 changes the frequency of the comptroller’s property value study from annual to biennial. About half of the state’s school districts’ property values will be studied each year. The other half will undergo a review of their standards, procedures, and methodology. HB 8 also establishes a Property Value Study Advisory Committee to help the comptroller draft rules governing the conduct of the standards and procedures study.
Timing of study. Under Government Code, sec. 403.302, the comptroller will conduct a study at least every two years in each school district for which the most recent study resulted in a determination by the comptroller that the school district’s value was valid, and each year in a school district for which the most recent study resulted in a determination by the comptroller that the school district’s local value was not valid. In any year in which the comptroller does not conduct a study of a school district, its local value for that year will be considered valid.
Study results. The property value study will use the results of a study of property values produced by an appraisal district to determine the school district’s taxable value in a year when the comptroller had studied the property values produced by the appraisal district. The study will follow the same procedures and apply the same margin of error that the comptroller currently uses.
The property value study will use the market value provided by an appraisal district, minus certain tax exemptions, to determine the taxable value of property in a school district in a year when a study of a school district’s taxable value has not been done by the property tax division.
Review of appraisal district procedures. HB 8 establishes guidelines for the review of appraisal districts’ standards, procedures, and methodology, which will take place at least once every two years. The comptroller will review the governance of each appraisal district, taxpayer assistance provided, and the operating and appraisal standards, procedures, and methodology used by each appraisal district. The review will determine compliance with generally accepted standards, procedures, and methodology. The comptroller by rule may establish procedures and standards for conducting and scoring the review.
Failing to take remedial action. HB 8 changes the mechanism for conservatorship of appraisal districts that fail to comply with the comptroller’s recommendations for improvement. If the appraisal district fails to comply with the recommendations in the report and if the comptroller finds that the board of directors of the appraisal district fails to take remedial action reasonably designed to ensure substantial compliance with each recommendation in the report within a year, the comptroller will notify the Board of Tax Professional Examiners, or a successor agency, which will be required to take action necessary to ensure that the recommendations are implemented as soon as practicable. Before February 1 of the year following the year in which the Board of Tax Professional Examiners, or a successor agency, takes action to ensure substantial compliance with each recommendation in the report, the board will determine, with the assistance of the comptroller, whether the recommendations in the most recent report substantially have been implemented. The presiding officer of the board will notify the chief appraiser and the board of directors of the appraisal district of the board’s determination.
HB 8 would increase accuracy and improve standards and practices of property appraisals in Texas. Under current law, there is no state oversight beyond the property value study, and the current system does not exert enough pressure on appraisal districts to produce accurate and professional valuations.
Changing the frequency of the property value study from annual to biannual would allow the comptroller to do more focused analyses of school districts’ taxable property because the number of appraisal districts’ valuations studied in a year would be halved. It also would allow the comptroller to examine more closely local appraisal standards and procedures. The comptroller’s property tax division staff would be able to check more closely for highly technical processesthat can be used to manipulate values, which often are overlooked in a more general analysis.
Reviews of standards and practices would be especially helpful to appraisal districts in smaller counties that can have difficulty recruiting qualified employees and whose tight budgets make training relatively expensive. These reviews also would help promote professionalism and uniformity in appraisal districts across Texas. One of the categories that an appraisal district would be graded on would be taxpayer assistance. The comptroller would look at office practices, the appraisal review process, and other aspects of the office to ensure that appraisal districts were in compliance with best practices. These reviews would help restore confidence in the property tax system.
HB 8 would not encourage appraisal districts to lower their property values. The review of standards and practices would discourage them from undervaluing property in the off years. Further, they would not be able to keep appraisals flat for one year and then catch up on the next because the existing 5-percent allowable variation in local appraisals above and below the comptroller’s value determination may not provide enough leeway in the catch-up year. In addition, only the appraisal districts that produced valid local values would be eligible to be studied every other year. Those appraisal districts that did a poor job would continue to face annual studies. Finally, those appraisal districts that lowered their values in an off year would open themselves up to additional and costly litigation.
HB 8 would be an excuse for appraisal districts to lower their property values, potentially costing the state more under the school finance formulas that send more state aid to districts with lower property values per student. Because their values would be studied only every other year, districts would be tempted to keep the values flat in the off year.
Many Texans already lack confidence in property appraisals. HB 8 would erode that confidence further if they perceived a pattern of no appraisal growth, followed by large jumps in anticipation of the property value study.
HB 8 would be too much of a change. The bill would be improved by including a Sunset provision so that the Legislature could examine several years of data and make changes and improvements or even discontinue the program if necessary.
Including foreclosed homes in homestead property appraisals
HB 1038 by Paxton
Effective January 1, 2010
HB 1038 requires an appraisal district to include comparable foreclosed and distressed homes when valuing a residential homestead.
HB 1038 directs appraisers, when valuing a homestead, to consider the value of properties that were foreclosed upon during the prior three years and were comparable to the homestead at the time of the foreclosure sale. Appraisers also must include those distressed homes whose value has decreased due to a declining economy. To be comparable, these foreclosed and distressed properties must be in the same neighborhood and have similar relevant characteristics.
By requiring that foreclosure sales of homes in the same neighborhood be taken into account in determining their value for property taxation purposes, HB 1038 would help ensure more accurate property appraisals. When selecting properties to compare for valuation purposes, appraisers routinely exclude properties that have been foreclosed or sold at auction, even if those homes were comparable at that time. This practice is widespread because appraisers interpret sec. 1.04(7)(C) of the Tax Code as directing them to do so, because the properties were not sold willfully through an arm’s-length transaction.
Directing appraisers to take into account foreclosed properties would create a more representative pool of comparable properties for valuation. Foreclosed properties and those sold at auction tend to sell for significantly less than those sold through a normal agreement. Including these properties should result in property-tax relief as individual appraisal values would more accurately reflect neighborhood sales prices.
The current system takes too long to account for the effects of foreclosed properties on home values in a neighborhood. It can take two, three, or even four years to account for the effect that a foreclosed property can have on neighborhood property values. HB 1038 would require that the effect of foreclosure sales be taken into account much sooner, creating more accurate appraisals.
HB 1038 would direct appraisers to include foreclosed properties that sold within the past three years because not all neighborhoods or communities have enough turnover in homeowners to find comparable foreclosed homes within the past year or two. Some rural areas or smaller neighborhoods may even have trouble finding comparable sales within the previous three years. Most appraisers agree that a three-year period is an appropriate time frame.
HB 1038 would look back too far in time by including foreclosed properties that sold at auction within the past three years. A year-long window would be more appropriate because there is enough property turnover in Texas, especially in urban areas, that a year would provide more than enough comparable sales data and limit comparisons to only the most recent, and therefore the most relevant, sales.
Property appraisal revisions
HB 3611, HB 3612, HB 3613, and HJR 36 by Otto
Generally effective January 1, 2010
HB 3611, effective January 1, 2010, allows the boards of directors of two or more adjoining central appraisal districts to form a consolidated appraisal review board by interlocal contract.
Supporters of HB 3611 said
HB 3611 would allow rural counties to form consolidated appraisal review boards, allowing them to take advantage of certain efficiencies. Many rural counties encounter difficulty finding enough qualified and willing candidates to sit on their appraisal review boards. HB 3611 would allow counties to join together and pool their talent. Having fully staffed and qualified appraisal review boards would help to ensure a more professional, equitable, and timely appraisal review process.
Opponents of HB 3611 said
Only residents of an appraisal district should decide appeals of appraisals of property located in that district. Local appraisal review boards know their county markets and local economic realities. Bringing in outsiders from another county could result in a loss of local control of a local issue
HB 3612, effective January 1, 2010, directs the State Office of Administrative Hearings (SOAH) to develop a pilot program for a property owner to appeal to SOAH an Appraisal Review Board (ARB) decision regarding a protest of appraised or market value if the appraised or market value is more than $1 million. SOAH must develop this program by January 1, 2010. The pilot program will cover Bexar, Cameron, Dallas, El Paso, Harris, Tarrant, and Travis counties for a three-year period beginning January 1, 2010. The program will cover real or personal property, not including industrial property or minerals. The program expires in 2013.
Supporters of HB 3612 said
HB 3612 would create a pilot program that would provide an interim step between an ARB decision and an appeal to district court. Many taxpayers are unhappy with the ARB process but cannot afford to appeal their cases to district court, as the cost of doing so often exceeds the tax savings they hoped to obtain. Under current law, property owners whose property is valued at less than $1 million have the option of going to binding arbitration. Doing so can save tens of thousands of dollars from the cost of appealing to district court. However, property owners whose property is valued at more than $1 million do not have this option. HB 3612 would allow these property owners, if the property in question was located in one of the seven most populous Texas counties, to take their appeals to SOAH. SOAH expects the average cost of these hearings to be between $1,500 and $2,000. This would result in significant cost savings compared to an appeal in district court and would open up an avenue for a meaningful and professional appeal to those who otherwise might not find it economical to pursue one.
HB 3612 would promote confidence and professionalism in the appraisal system. Taxpayers would have an avenue for an appeal that would be independent of the appraisal district, increasing confidence in the system. Further, as administrative law judges (ALJ) heard these tax appeals, they would become more expert, and a body of opinions would form that would better direct future tax appraisal practices. These would be deterrents for everything from poor appraisal practices to frivolous appeals.
HB 3612 also would help speed up the appeals process, as ALJs would resolve cases in about 30 days. Under the current system, some appeals have taken longer than two years to be resolved by district courts. Further, HB 3612 would not promote a proliferation of frivolous appeals because those who lost would be required to pay for the cost of the appeal to SOAH. The chief appraiser would be able to appeal to SOAH if the appraisal district’s board of directors voted to allow it. This also would provide an important check on possible misuse of this appeals process.
HB 3612 would require that appeals from SOAH to district court be by a trial de novo, starting afresh without being bound by any prior ruling, in order to protect the interests of property owners. One of the goals of HB 3612 would be to open up theappeals process to those who otherwise would find it uneconomical to appeal. If the standard of appeal were a review of whether substantial evidence justified the previous decision, then a taxpayer would have to be represented by an attorney in order to follow rules of evidence and procedure and to ensure that issues would be preserved for appeal. HB 3612 would allow a tax payer to be represented by anyone who currently can represent a taxpayer before an ARB.
Even though a trial de novo standard would allow parties two chances at appeal, HB 3612 would require that the findings of the ALJ be admissible in district court and the party that lost the SOAH hearing be required to pay for that hearing. This would help to deter automatic appeals and should result in district courts having to hear fewer property tax appeals.
Creating an appeals system for certain property-tax appraisals through SOAH would be a better approach than allowing non-binding arbitration. SOAH hearings would prevent more litigation than non-binding arbitration would because non-binding arbitration would not prevent a party from simply appealing a case to district court. Further, because SOAH is independent of any taxing entity, taxpayers would feel that they had received a fair and impartial hearing, something many taxpayers feel they do not currently receive at ARB hearings.
The SOAH appeals system that HB 3612 would establish would be a pilot program. It would expire after three years unless the Legislature renewed it, and it would apply only to the seven largest urban counties. This program would be limited enough to allow the Legislature to evaluate it and improve it as needed or scrap it in favor of a better solution.
Opponents of HB 3612 said
HB 3612 would not reduce the amount of litigation surrounding property-tax appraisal because it would require that an appeal from a SOAH decision to district court be by trial de novo. Because litigants would not be bound by the decisions of an ALJ, they would not be deterred from trying a second appeal before a district court.
A better approach would be to allow property owners whose properties were valued at more than $1 million to go to non-binding arbitration as an option before they appealed to district court. This option would reduce the number of cases that ended up before district court, would use the already well-established arbitration system, and would not require an expansion of SOAH’s duties.
HB 3613, effective on January 1, 2010, requires that the land of a residence homestead be appraised as a residence and not based on the highest and best use of the property.
The bill also entitles a veteran classified as having a 100 percent disability rating as a result of military service to a tax exemption for the total appraised value of the veteran’s residential homestead. HB 3613 also revises the disability ratings to determine disabled veterans’ property tax exemption as less than 30, 50, and 70 percent rather than not more than those percentages. These provisions of HB 3613 took effect June 19, 2009.
Supporters of HB 3613 said
The constitutional requirement that property be taxed in proportion to its value has all too often meant that county tax appraisers have valued property on its “highest and best use” rather than on its current use. For example, a residential property in or near a commercial district may be valued based on its commercial potential even though it currently is being used as a residence. HB 3613 would require that the market value of a residence homestead be determined by its value as a residence homestead, regardless of whether it is the highest and best use of the property.
Some Texas homeowners have seen their property appraisals double or even quadruple in a short period, not because the value of their homes increased, but because the highest and best use of the land dramatically changed. While the 10-percent cap on annual increases in taxable value of residence homesteads mitigates the impact of large increases in appraised market value, it still means that every year the taxes on the property will rise substantially. Where property use is restricted by zoning regulations, residential homesteads are somewhat protected from dramatic changes in highest and best use — for example, from residential to commercial. But those areas of the state not covered by zoning regulations are susceptible to dramatic appraisal increases based solely on the changes of land use in the area where the homestead happens to be located.
Texas already protects certain types of property from large appraisal increases due to changes in highest and best use. For example, the taxable value of agricultural or timber land is appraised based on the land’s capacity to produce agricultural or timber products, not on its market value, which usually is much higher. Residential homesteads do not have such protection.
HB 3613 would protect Texas homesteads from increases due to changes in highest and best use by ensuring that the properties were appraised only on the basis of the property’s value as a residence homestead. These protections are especially necessary to protect homeowners whose neighborhoods are in transition from residential to commercial use. This limitation on the appraisal process would apply only to residence homesteads, not to other residential property such as apartments or vacation homes.
Opponents of HB 3613 said
HB 3613 would arbitrarily move the property appraisal process further away from a true valuation of property according to its worth. According to the LBB, allowing residential homestead property to be valued based solely on its residential use and exempted from a highest and best use valuation would reduce taxable property values, thereby reducing local tax revenue and potentially requiring a local tax increase or spending cuts to offset the revenue loss. The owners of residence homesteads already receive a substantial benefit from the 10-percent annual limitation on the increase in the taxable value of their property plus other value exemptions and tax freezes, which owners of other types of property do not receive.
When school districts’ property values per student are lower, the state must provide additional funding to these districts under the Foundation School Program’s equalization formulas. The state cannot afford to increase its obligations in this manner, especially when state finances are expected to be spread thin over the next few years.
HJR 36 proposes three separate constitutional amendments. One would authorize the consolidated appraisal review boards implemented by HB 3611, and one would authorize the requirement that residence homesteads be appraised based solely on their value as homesteads rather than the highest and best use, as implemented by HB 3613.
HJR 36 also includes a third proposed constitutional amendment that would eliminate the current requirement that administrative and judicial enforcement of uniform standards and procedures for property appraisal originate in the county where the tax is imposed. All three amendments passed in November.
Supporters of HJR 36 said
While appraisers are trained and certified, the only check on appraisals are appraisal review boards and expensive litigation in district courts. HJR 36 would help to improve appraisals when they were initially conducted through state enforcement of uniform statewide standards that would ensure more accurate and equitable appraisals.
Opponents of HJR 36 said
HJR 36 could lead to a loss of local control. Central Appraisal Districts know their local markets and economic realties better than state officials do. Enforcing standards at the state level could impose a one-size-fits-all solution that might not produce the most accurate appraisals for each locale. H – This excerpt was reprinted with permission from the House Research Organization, a nonpartisan department of the Texas House of Representatives that examines state issues and analyzes legislation being considered by the Texas Legislature. To view the report in full, go to http://www.hro.house.state.tx.us/focus/major81.pdf.