Reform TIRZs, Don’t Repeal Property Tax Cap

My former colleagues at the Houston Chronicle editorial board opined this week that the City’s property tax cap should be repealed and that the tax increment reinvestment zones (TIRZs) need to be reformed.  [Click here to read.]  They are wrong on the first count but right on the second one.

To begin, let’s get some facts straight that were mangled in the editorial.

First, the City does not have a revenue cap; it has a property tax cap.  Property taxes make up about 25% of the City’s total revenue.  That is the only source of revenue that is limited under the City charter amendment that was approved by voters in 2004.  The other 75% of revenue is not restricted.   There is a cap on all revenues in the charter that was also approved by the voters in 2004, but because the property tax cap got more votes, the City only enforces the property tax cap.

Repeal advocates insist on mischaracterizing the limitation as a “revenue” cap to mislead the public into believing that the City’s ability to raise any form of revenue is impaired by the restriction.  But since the charter amendment was enacted, City revenues have increased by a whopping $2 billion (67%), including the enactment of the drainage fee, which was the largest single tax increase in the City’s history.

Second, the increase in taxes is not “constrained by an arbitrary algorithm.”  The limit is the lesser of population growth and inflation or 4.5%.  Limiting Council’s ability to increase property taxes to population growth and inflation is a reasonable limitation and should be a rough estimate of the need to increase taxes.  If the City’s population and inflation were growing by more than 4.5%, I would have to agree that the limitation is arbitrary.  But because the City’s population has been growing at a very slow pace and inflation has been low since 2004, the 4.5% limitation normally does not come into play.

Third, and most importantly, the property tax cap repeal advocates always omit that the charter amendment begins with this clause: “The City Council shall not, without voter approval . . .”  In other words, in any year that the Mayor and Council believe that the City needs more tax revenue than the limitation allows, all they need to do is ask for the voters’ approval.  If they feel handcuffed by the charter amendment it can only be because they believe they cannot make a credible case to the taxpayers to pay more.

My former colleagues are right about the detrimental effect the TIRZs are having on the City’s finances.  Last year, the TIRZs collected $132 million in property taxes, nearly 14% of the City’s total property taxes.  That is more money than the drainage fee brought in last year.

They are also correct that the taxes collected by the TIRZs are excluded from the property tax cap.  As a result, TIRZ tax receipts have soared.  Last year the property taxes collected by all TIRZs increased 13%.  The receipts for the six richest TIRZs went up by an astonishing 27%!

Of course, the City has devised a number of clever ways to claw back more and more of this revenue over time and subvert the voters’ intention as expressed in the cap.  Each TIRZ pays the City an administrative fee and most make other contributions toward “shared” expenses.  But there is no question that if the City had all of this revenue back, it would go a long way toward solving its long-term structural deficit.

One of the challenges in bringing any of this revenue back to the City is that the TIRZs have been on a debt binge in recent years.  They currently owe around half a billion dollars.  So, much of their revenue is committed to repaying that debt.  Of course, voters had no say in the creation of this debt, notwithstanding that property taxes will be used to repay it.

There are certainly some good projects that are undertaken by the TIRZs.  But increasingly they are grasping for projects on which to spend their largess; witness the idiotic $200 million bus lane project in Uptown.

Of course, our benevolent State Legislature has its finger in all of this.  All of the TIRZs were created by state statute.  So, the State will have to be involved in any restructuring.  Given numerous conflicts of interests between our local delegation and the TIRZs and their first cousins, the management districts, good luck with that.

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