TOM PAUKEN WAS PROUD TO BE A CONSERVATIVE REPUBLICAN way back in the days when most of Texas’ other conservatives were still Democrats.
The Dallas businessman led the national College Republicans in the 1960s, served in the Nixon Administration in the 1970s, ran twice for a Dallas Congressional seat (unsuccessfully) in the 1980s (when he also served in the Reagan administration) and ran for Texas attorney general in the 1990s (also a loss).
Long known as a bare-knuckles activist, Pauken has paid his dues in building the Texas GOP over the past 40 years, building a reputation as a man of principle unafraid to mix it up with Democrats and even fellow Republicans of different viewpoints. During George W. Bush’s time as Texas governor, Pauken, who was the Republican state party chair, was considered a greater nemesis to the future president than the state’s lieutenant governor or House speaker, both Democrats.
In August, Gov. Rick Perry called on Pauken to head the new Task Force on Appraisal Reform, a role that the Republican warhorse has taken on with gusto, traveling around the state not just at scheduled public hearings but also at ad hoc meetings of taxpayer groups and associations who want to get their two cents in.
And despite his long reputation as someone willing to mix it up to get his way, Pauken is attempting to bring his 15-member study commission together in support of a package of diverse proposals that promises something to like – and something to dislike - for each of the various competing interests.
After just four of 11 scheduled hearings, Pauken already felt comfortable floating a compromise approach at a meeting of 400 Realtors, who were assembled in Austin for a training session on legislative advocacy and board leadership training.
The package would put a wrench to local
And to tie it all together, he called for a complex, local option tradeoff that would use a new sales tax to buy down property taxes, tied to a local appraisal cap and a higher local homestead exemption.
“If all of this stuff is stand-alone, most of it’s going to fail, but if you put something together you might say ‘I don’t like this part of it but overall it’s a lot better than what we’ve had.’ That’s my own sense,” Pauken told the press after the Realtors talk. “If you do it all standalone, different interests are going to kill this part or that part.”
While all of those killable parts were discussed during the task force’s initial hearings, Pauken emphasized that the package proposal he was airing was his own, not the consensus of the task force, yet. Each of the proposals has its own advocates and adversaries.
If there was a recommendation that was predetermined to be among the final proposals of the Perry-Pauken task force, it would have to be the idea of lowering the current rollback rate from 8 to 5 percent and removing the petition requirement – if a local government wants to spend a dime over a 5 percent increase in the effective tax rate, it would have to hold an election. Revenue caps have been one of Perry’s main concerns since 2004.
What makes the revenue caps idea a good sound bite is resentment that newly constructed properties and increased appraisals (up to 10 percent increase annually) allow local governing bodies to approve higher spending even as they adopt the same or even lower tax rates. Perry calls it “appraisal creep” but Pauken has his own name for it – “the stealth tax.”
“In too many instances, as appraised values skyrocket, local governmental units benefit from that tax windfall and rather than give a substantial portion of those additional revenues back to the taxpayers by cutting tax rates significantly, most if not all of those revenues go for higher government spending,” Pauken explains in his basic speech explaining the issue. “Once it got over a 5 percent level, all you had to do was take it to the voters and the voters would have their fair say. To me that’s true local control and a local option on the part of the people having their say when increased spending goes too high.”
Pauken likes to point out that the Legislature imposed a 4 percent revenue cap on Texas schools last summer in adopting its school tax swap. “My sense is that would impose financial discipline that is badly needed in many of our entities similar to the financial discipline that we who are in the private sector (experience),” he told the Realtors.
Also hot on the idea of voter approval of tax rates is task force member Michael Stevens of Houston. Stevens, an apartment developer, is known locally for having led an unsuccessful fight against a 2003 transit proposal, along with anti-government radio announcers Dan Patrick and Ed Hendee. At the task force hearings, Stevens is quick to ask those testifying on taxes, especially public officials, why they would oppose voters getting to consider spending increases. When the task force was first assembled, Stevens commented to his fellow members that he pays taxes on $750 million worth of apartment investments he has in Houston and Dallas.
Other real estate executives apparently supporting revenue caps on the group are Georgetown Realtor Avis Wukasch, chair-elect of the 80,000 member Texas Association of Realtors, and Amarillo broker Robert E. Garrett, who chaired a 56-member TAR committee that studied appraisal district procedures this summer.
Garrett’s study failed to mention revenue caps but Garrett’s fellow Coldwell Banker broker in Amarillo is TAR Secretary-Treasurer Randy Jeffers, who emphasized TAR’s support for the concept when Pauken spoke to the group in Austin. Little wonder, since the organization distributed hundreds of revenue cap stickers to its members who came to Austin for Realtor Day last year and since it employs lobbyist Mike Toomey, the former Perry chief of staff who steered the governor’s early support of local government caps back in 2004.
TAR’s political arm, TREPAC, is the best-funded association PAC in Texas, with a 2007 fundraising goal of $2.8 million. Several county officials, however, have made their position clear, testifying that revenue caps would lead to longer lines and less services, especially when it comes to those “quality of life” programs that are optional but that local citizens expect.
Revenue caps are not a high priority for Brazos County Assessor- Collector Buddy Winn, who was first elected in 1979 and who is one of 15 assessor-collectors in Texas who also serves as chief appraiser, a position he has held since 1982. Winn is known for spending much of each legislative session in Austin and for his encyclopedic knowledge of property taxes.
His primary concern is defeating lowered appraisal caps, but not because of their impact on county finances.
“I could care less looking at it from the standpoint that the counties or cities are going to lose a hundred million dollars due to appraisal caps,” Winn said. “I’m looking at (appraisal caps) from the standpoint that it’s not fair for your neighbor to be paying on an $80,000 value and you to be paying on a $120,000 value when you got the same, identical house. There’s nothing fair and equal about that.”
During the early hearings, appraisal caps did not seem to be gathering a great deal of steam. In Austin, the concept is opposed not only by TAR (“Appraisal caps are discriminatory, ill-advised and controversial”) but also by the influential Texas Taxpayers and Research Association (TTARA), which represents medium-sized and large businesses, including many in the oil, gas and petrochemical industries. TTARA has long supported the fundamental structure of the Texas property tax system and its 100 percent valuation framework. It particularly doesn’t like appraisal caps that apply only to residential homesteads, since that would shift the tax burden to nonresidential taxpayers.
In addition to the opposition to appraisal caps by those two heavyweight groups is the fact that lowering the annual cap below the current 10 percent requires both a two-thirds vote of both House and Senate as well as statewide voter approval of a constitutional amendment.
When appraisal cap supporters tried to push the measure through the House in 2005, it not only failed to get two-thirds, it couldn’t even get a majority.
Just the same, the appraisal cap idea is still popular among the broadcast audience of Houston radio personality Patrick, who was almost certain to be elected to the Texas Senate this year after crushing three state representatives in the GOP primary battle for the seat of retiring Sen. Jon Lindsay. Patrick, fellow radio talker Hendee and Harris County Assessor-Collector Paul Bettencourt have campaigned for appraisal caps since at least 2002 and took the position last year that revenue caps are just a diversion from their goal. “The counties and cities have figured out a way around revenue caps,” Patrick insisted to his listeners. “Anything short of lower appraisal caps is a defeat.”
Testimony that Texas’s school financial structure actually encourages higher appraisals has opened some eyes of panel members, as well as among some members of the public in the audience. Specifically, state budget contributions to school districts go down as local property tax collections go up, so the setup provides for the state comptroller’s staff to conduct annual audits of appraisal district operations to make sure that local appraisals are set at least at 95 percent of market value. If not, school districts suffer financial penalties and if it happens too frequently, the law provides that the chief appraiser can be fired and the district placed in the hands of conservators appointed by a district judge.
As one might expect, the arrangement creates a certain amount of tension between the chief appraisers and the comptroller’s staff. Anderson County Chief Appraiser Carson Wages explained it to the task force at their Lufkin hearing.
“When we do not come up to what is expected by the comptroller’s office, we get The Review. Well, I have been Reviewed,” Wages said. “They come to your office and spend a week until you copy reams of paper over and over and over. And then they go back to Austin and a while later, you get a notice on their Web site that you don’t do a good job. Well, I think my people do a good job.”
Similar resentment was expressed by other chief appraisers at the early hearings.
“We do reappraisals not to generate revenue but to keep from losing state funding,” said Nacogdoches Chief Appraiser Gary Woods, who said he also accepts the need for the comptroller to do the value study. “If you do away with the study, it does away with the control for equality from one district to another district,” he said. “We may have equality in our county, but we may be far behind (the county next door), and that’s what the study does. It keeps the districts honest from county to county.”
But an idea promoted by Travis CAD chief Art Cory has received considerable attention from the task force, especially after state Rep. John Otto of Dayton testified in Lufkin. Otto cited a story he’d heard from Cory during legislative hearings last summer regarding differing appraisals prepared on a commercial office building in downtown Austin whose appraised value was in dispute.
“The chief appraiser hired two appraisers, denied them prior knowledge
of what was going on in the dispute, and asked them to come back
with an appraisal of this piece of property,” explained Otto, a former
chair of the Liberty County appraisal board. “When the two appraisals
came back, their values were 30 percent apart. Yet we expect our
appraisal districts to fall within a 5 percent margin of error on something
as subjective as a property appraisal.”
Cory’s testimony, he said, “points out that appraising property is not scientific and is in fact subjective.”
The net effect is that under threat of penalties, appraisal districts err on the side of higher appraisals, he said.
“This policy in my opinion is resulting in property being appraised in excess of fair market value, especially in light of the fact that the higher of the appraisal district’s value or the comptroller’s value is what is required to be used by the statute,” he said. “The current annual study performed by the comptroller’s office can in my opinion lead to sales price chasing applied across the county and unwarranted pressure on the appraisal districts to increase value.”
To address the issue, in the last special session Otto filed HB 60, which would have reduced the margin of error down to 90 percent as a way to ease pressure on appraisal districts, and consequently, on taxpayers. Time ran out on the bill during the special session but Otto acknowledged that the bill was also handicapped by its fiscal note – in order to make up for lost local property taxes, the state would have to find an additional $228 million in school funding in the first year it would be in effect. By the third year of more lax appraisal standards, the cost to the state would zoom to $765 million.
“The longer you go, the more the impact that this has,” Otto said. “But I’m willing to absorb that by the state; otherwise, the rate relief we just gave (in the last special session) doesn’t mean anything.” A week after Otto’s testimony, Pauken told the Realtors that he not only supported the 90 percent standard, he also wants to provide that the comptroller audit local districts’ values every three years instead of annually. In addition, he said, appraisal districts should appraise only a third of their properties each year. The net effect would be less pressure on appraisal districts and ultimately, lower tax bases.
But at the Lufkin hearing, Woods, the Nacogdoches chief appraiser,
pointed out that his district used to do take the one-third, one-third,
one-third approach.
“The fallacy we found that we ran into was, all of those (property owners) are in my county. And somewhere there’s a road that divides this guy on one side of the road who got hit by a reappraisal and his neighbor who didn’t, and I can guarantee you, they’re going to talk,” he said. “If we waited three years and there were 10 percent increases in value each year during that time, we’d hit them with a 30 percent increase in one year. That’s astronomical.”
Another complaint raised by Rep. Otto is the process where property owners formally present their appeals to appraisal review boards (ARBs), the 3-member panels appointed by appraisal districts whose boards are appointed by the taxing jurisdictions whose funding is decided by appraised values. Those relationships create a perception of bias, he said.
“The hearings are frequently held at the offices of the appraisal district and especially in rural counties, the appraisal review board members have frequent contact with the same staff throughout the entire appraisal review hearing process,” he said.
He also noted that taxpayers sometimes see the same ARB members appointed year after year.
“I think the taxpayer walking in the door wants to feel like they’re getting a fair hearing, and when they see people that have consistently been rotated on and off the appraisal review boards, I don’t think they get that feeling,” he said.
In Brazos County, Winn said finding people who understand local land values can be difficult, especially in smaller counties. “It’s a problem finding someone who knows what property values really are,” Winn said. “And in these small counties, you run out of review board members after a while so they appoint Mrs. Jones because she was Dr. Jones’ wife and they needed a body so they put Mrs. Jones on there. She has no concept of what a property’s worth, especially a property like an oil well or something that’s more complex.” The Realtors study panel also found several complaints with ARBs. They cited problems with ARB members who don’t understand more complex appraisals.
“Many taxpayer disputes, while impressive in factual detail, are lost due to the complexity of the dispute and the lack of experience of the ARB members,” the study concluded. “The lack of experience of ARB members severely inhibits impartiality and gives an advantage to the appraisal district.”
Pauken said he also thinks the ARBs should be restructured, based on the testimony before the task force.
“I’ve heard people talk about how it’s having the prosecutor picking the jury,” he said, adding that he may recommend appointment of a local taxpayer’s ombudsman to help taxpayers understand the appeals process.
The relationship between the appraisal district boards and the taxing entities that appoint them has also drawn scrutiny.
“Under the current system, the appraisal board which appoints the chief appraiser are 100 percent appointed by the local governmental entities that, let’s face it, have an inherent stake in higher appraisal values,” Pauken told the Realtors. “Under the current system, the chief appraiser is not really accountable to the taxpayers in any fashion whatsoever.”
The Realtors’ position, in fact, is that the entire board should be elected, but Pauken suggested he preferred a plan for the board to be comprised of five members: two appointed by the local governments of the county, two elected by voters and the elected county tax assessorcollector. Asked by a reporter what would prevent candidates for the board position or assessor-collector from running for office on a “I-will-loweryour- appraisals” platform, Pauken said “I think (the candidates) have to understand that you’ll follow the rules in terms of fair market value.”
“Something that says you’re going to follow the law,” he replied, noting that there are likely to be experienced board members already appointed by the jurisdictions. “There needs to be a way to address the perception problems.”
Brazos’ Winn was skeptical about elected board members. “The crazy people and the people with an ax to grind are going to jump in and run for those two elected spots and all they are going to do is create problems,” he said.
Several public officials have suggested that real estate sales prices should be made available to the appraisal district as a way for appraisals to be based on more accurate information, especially in the case of commercial properties. For residential properties, many CADs have access to Multiple Listing Service (MLS) data maintained by local Realtors but sales prices are not recorded on MLS for nonresidential properties.
Realtors on the task force have expressed skepticism about mandated disclosure, which Pauken acknowledged in announcing his support for the change, as long as provisions are made to protect confidentiality.
Also, Pauken pointed out that knowing the cash exchanged in a commercial sale does not necessarily mean the appraisal district knows a property’s value. When a business sells, for example, the value of the business itself (as well as other assets) must be separated out from the value of the land and structures involved to obtain an the market value of the real estate.
“Deals are different,” he said. “How do you make the distinctions? But I think (sales price disclosure) is part of the overall solution.” Mark Evans testified that before he was Trinity County judge, he was an appraiser at the Texas General Land Office and has appraised other properties.
“We find that residential sales information is easily acquired but trying to find out information on sales of commercial and industrial properties is very difficult to find,” he said.
Garrett, the Amarillo Realtor on the task force, pointed out to Evans that “people who are opposed to (disclosure) would say that it interferes with free market forces when the buyer knows what the seller has invested in a piece of property.”
“I guess they’re entitled to their opinion,” Evans replied, adding that when he has appraised nonresidential properties in other states, “they have sales price disclosure and it doesn’t seem to affect them.”
Evans added that “studies indicate that you have a disproportionate share of the property tax burden falling on homeowners because residential properties are taxed closer to market value than the other properties (so) if you’re going to look at the (property tax) issue, look at the whole issue.”
The Texas Association of Realtors, which supported sales price disclosure at the beginning of the 2004 legislative session, is now withholding support until the overall appraisal system is overhauled. “The current appraisal system is broken and inherently unfair to property owners and should be reformed before TAR revisits sales price disclosure,” reads their position statement.
Because of the obvious mountain of opposition to appraisal caps, Pauken included them in the compromise proposal that he presented to the Realtors. Apparently, the only way for Pauken to get serious consideration for appraisal caps is by tying them to other components that may appeal to interest groups so much that they would drop their opposition to caps.
In addition to the bulleted items at the beginning of this article, Pauken proposed the possibility of local option elections (called by commissioners court or by taxpayer petition) that would allow for levying a half-cent sales tax with revenues dedicated to a dollar-for-dollar reduction in property taxes. If approved, this proposal would be tied to a 5 percent appraisal cap on both residential and commercial properties within that county, as well as an increase in the homestead exemption in an amount yet to be recommended. The sales tax monies would be distributed to all local jurisdictions “on a pro rata basis.”
In talking to the press afterward, Pauken explained this package
might appeal to several interests. First, many Republicans support
appraisal caps, he said, and in addition, industry might support them
as long as they don’t offer an advantage to residential properties.
Second, some Democrats in the Legislature have supported the increased homestead exemption, which would have the effect of granting a greater share of tax relief to lesser valued properties. Finally, local governments might be willing to support the half-cent sales tax, he added, since it’s the only proposal out there that would not result in less revenue for the property tax buy-down.
The sales tax trade-off was proposed at the task force’s hearing in Tyler by Sen. Kevin Eltife, who was Tyler’s mayor when that city passed a similar sales-for-property tax swap back in the 1990s. As soon as Eltife suggested expanding that approach, Pauken jumped on it. Pauken conceded that for several years, legislators have declined to grant further sales tax authority to local governments because, they said, they want to reserve that revenue for state government budget growth in the future.
“Now I know some of the legislators always want to keep a little bit in reserve for themselves down the road, but I think one half-cent would definitely not be something that would be a deal killer from the legislative standpoint,” he said.
Another possible stumbling block is that sales taxes have long been criticized by the poverty lobby because they are perceived to be “regressive.” That is, everyone pays sales taxes with their purchases, but studies indicate that poor people spend a significantly higher percentage of their money on sales-taxable items than wealthier people.
Also interested in Sen. Eltife’s sales tax suggestion was task force member Timothy P. Roth, chairman of the Department of Economics and Finance at University of Texas at El Paso. He said he was convinced that the key approach to reducing property taxes was to offer some form of “consumption tax” such as a sales tax. In addition to sales taxes, other obvious forms of consumption taxes are increases in the gasoline tax or allowing local option increases in the optional $10 county road and bridge fee.
Nacogdoches County Judge Sue Kennedy noted in her testimony that the road and bridge fee had not been increased since 1989.
Other than proposals by Democrats in the Legislature, the idea of
providing for a higher homestead exemption had hardly been raised
at the task force until Pauken put it in his “package deal” (see above).
The advantage would be to property owners at the lower end of the
economic spectrum.
Originally, the statutes authorized local governments to go as high as a 40 percent homestead exemption, he said.
“A few gave 20 percent but nobody gave 40 percent that I’ve heard of,” he said. Instead, the law offered the option of setting a $5,000 minimum “and almost everybody jumped on that just like a duck on a grasshopper. They gave them $5,000, and people thought they were getting something.”
Now, the law limits the percentage to 20 percent, which Winn said he favors because it’s more fair than a flat amount. “If you’ve got a $10,000 trailer house, you get 20 percent off or if you got a $10 million home, you still get 20 percent off.”
Several officials have testified about county budget problems caused by unfunded mandates, including Nacogdoches County Judge Sue Kennedy. Her list included expanded indigent defense costs including child protective services cases, having an engineer or architect on all renovation and building projects (instead of only those over $20,000), implementation of Help America Vote Act election requirements, provision of law enforcement video equipment to record all public contacts, increased days holding state inmates in local jails, increased jury pay that may not be fully reimbursed and expanded use of technology, particularly since some state and federal agencies are now requiring all business to be conducted online. Pauken, at least, has heard the mandates complaint and consistently acknowledges that local governments have a legitimate beef.
“Local governments do have very legitimate issues (including) unfunded mandates,” he told the Realtors. “A solution needs to be part of a comprehensive solution (to property tax reform).”
County leaders have emphasized that protection from mandates should be placed in the state constitution; protection afforded only via legislative amendment could be easily ignored or further amended by future legislatures.
Pauken apparently understands the distinction. He said he wants
to the task force report to “provide some egregious examples of
unfunded mandates and encourage the Legislature to review those
and, going forward, put in place a process whereby – not the
Legislature but another force – would basically have to sign off and
certify that the passed legislation was not an unfunded state mandate
or if it is, provide the money to go along with it.”
He did not say whether the “force” should be a district court or the legislator-dominated Legislative Budget Board but he did specify that mandate protection should only apply to future state mandates, not those already in place or those handed down by the federal government.
Talking Across Texas: Panel trying to sort through an array of ideas