The Effective Tax Rate
The effective tax rate enables the public to evaluate the relationship between taxes for the preceding year and for the current year, based on a tax rate that would produce the same amount of taxes if applied to the same properties taxed in both years.
The calculation process starts after the chief appraiser delivers to the taxing unit the certified appraisal roll and the estimated values of properties under protest. The unit's tax assessor determines this information:
- the total appraised and taxable value of property in the unit;
- the total appraised and taxable value of new improvements; and
- the total taxable property annexed since the preceding year.
The assessor submits all of this information to the governing body. The governing body designates an officer or employee (often the tax assessor, but not necessarily) to calculate the effective tax rate and the rollback tax rate.
Calculating the Effective Tax Rate
Calculating the effective tax rate requires the prior year's taxes and the current year's taxable value for property taxed in both years. Dividing the taxes by the value (and multiplying by 100 to convert to a rate per $100 of value) produces the effective tax rate, as illustrated in Exhibit 1.
In practice, the calculation is slightly more complicated. The worksheets in Appendix 2 provide step-by-step details of these calculations. What follows is a general summary.
Prior Year's Taxes Less Taxes on Property Lost This Year
To calculate a 2008 effective tax rate, a taxing unit must first determine its total 2007 taxes. The effective and rollback rate calculations begin with the total taxes and values for the prior year at the time of the rate calculations. These totals include all supplements and corrections that have occurred to the tax roll since the prior year's certification and tax rate adoption. However, corrections ordered under Tax Code Section 25.25(d) are not included in these adjusted total taxes and values.
Section 25.25(d) corrections are late appraisal roll changes ordered by the appraisal review board (ARB) to correct one-third over-appraisal errors. Taxpayers may file for such corrections before taxes on the property become delinquent. Typically, taxpayers file for these corrections after receiving their tax bills. Some taxing units with substantial amounts of value reductions through Section 25.25(d) experience revenue losses in that budget year. To include these changes in the adjusted total taxes and values in calculating the effective and rollback tax rates for the current year would result in lower effective and rollback rates for the taxing unit. Thus, the Section 25.25(d) corrections are excluded.
The appraisal district may be able to assist the taxing unit in identifying supplements and corrections for the prior year.
Taxing units also may be required to refund taxes for tax years preceding last year. Units include the refunded debt taxes in "last year's debt levy" and total refunded taxes in "last year's levy." Taxing units include all types of refunds for years preceding the prior year – court decisions, Section 25.25(b) and (c) corrections and Section 31.11 payment errors – for tax years preceding tax year 2007.
For example, in 2008 a district court approved reducing a property owner's 2005, 2006 and 2007 taxable values, resulting in three years of tax refunds from the 2007 property taxes. The taxing unit includes the taxes refunded for 2005 and 2006. Taxes refunded for the 2007 tax year are not included. A second example is a taxing unit that refunded part of a 2003 payment for a Section 25.25(c) clerical error. The taxing unit includes the refunded tax amount in the total 2007 taxes.
A separate provision provides for any 2007 court-ordered refunds to be included as a separate step in the rate calculation. A taxing unit may increase the prior tax year's taxes to reflect lost taxes in the prior tax year because a court overruled an ARB decision with a lower taxable value.
The result of including these refunds in last year's levy is higher effective and rollback rates for taxing units. These higher rates give taxing units the ability to recapture revenue removed from last year's taxes to return money to taxpayers. The tax collector has information about refunds.
Truth-in-taxation laws also require the taxing unit to reduce last year's total taxes for the amount of "lost property levy." "Lost property levy" is the amount of taxes on property value that was taxable in the preceding year but is not taxable in the current year. Property value not taxed in the current year may have been deannexed by the unit, received a new exemption or qualified for special appraisal in the current year. The appraisal district has value information on these properties.
Property that first qualified for a new exemption does not include freeport property under Tax Code Section 11.251, "goods-in-transit" property, Section 11.253, or property receiving a tax abatement.
If a taxing unit adopted the tax ceiling provision in 2007 or a prior year for homeowners age 65 or older or disabled, the district adjusts last year's value by subtracting the value of homesteads with tax ceilings. These homesteads are for both homeowners who are age 65 or older or disabled.
Subtracting the revenue lost because of these changes gives the taxing unit's adjusted 2007 taxes.
Current Value of Property Taxed in the Prior Year
Before calculating its effective rate, a taxing unit must also adjust the 2008 values. The taxing unit begins with the total taxable value on the 2008 certified appraisal roll and adds the value of properties still under protest or known but not appraised for 2008. The unit then subtracts the value of new property – property annexed since Jan. 1, 2007 and improvements new to the 2008 tax roll. The result is the 2008 taxable values adjusted to include only the property that was taxed in both 2007 and 2008.
If a taxing unit adopted the tax ceiling provision in 2007 or a prior year, the district adjusts its 2008 values by subtracting the 2008 values of homesteads with tax ceilings and any new value subject to a Chapter 313 limitation agreement. The homesteads with tax ceilings are for both the homeowners age 65 or older or disabled.
A taxing unit also excludes the taxable value of property exempted for the current tax year for the first time as pollution control property. Since the taxable value of exempt property is zero, such an interpretation would not affect the current total value. Legislative intent would appear to require some adjustment. Taxing units that wish to exclude the market value of this exempt property should consult with their attorney.
Properties under protest. If a property's value is under protest when the taxing unit receives the certified appraisal roll, the chief appraiser submits both the appraisal district's and the taxpayer's estimated values. In calculating the effective and rollback tax rates, the taxing unit uses the lower taxable value.
If the property owner did not estimate a value, the chief appraiser must estimate the outcome of the ARB appeal. Two rules govern this estimate:
- if this year's appraised value is the same or less than last year's, the chief appraiser estimates the value that would be assigned if the property owner wins.
- if this year's value is greater than last year's, the chief appraiser uses last year's value. However, if it's likely that the ARB will reduce the value, the chief appraiser should estimate the ARB value.
Properties not included at certification. Tax Code Section 26.01(d) also requires the chief appraiser to give taxing units a list of those taxable properties that the chief appraiser knows about but are not included at the time the chief appraiser certifies the appraisal roll. These properties also are not on the list of properties that are still under protest.
On this list of properties, the chief appraiser includes the market value, appraised value and exemptions for the preceding year and a reasonable estimate of the market value, appraised value and exemptions for the current year.
A taxing unit's assessor shall use the lower market, appraised or taxable value (as appropriate) for computing the taxing unit's effective and rollback tax rates.
New property value. New property value will generate new revenue for a taxing unit. It helps to offset property value losses for new exemptions and special appraisals granted for the first time in the current year. The taxing unit will deduct new property value from the 2008 appraised values in the effective tax rate calculation.
The chief appraiser will supply the value of real and personal property new to the 2008 appraisal roll. For real property, new value includes additions to existing improvements (such as a garage) or new separate structures added to a property containing existing improvements (such as a company expansion) made after Jan. 1, 2007. Only the value of the individual new improvement is new value. The increased value on any existing structures is not new value. For personal property, new value includes only the personal property that is located in a new improvement and that entered the taxing unit after Jan. 1, 2007. New inventory in an existing building, new mobile homes and new vehicles do not count as new personal property value.
New property value also will include property value in the current year that was previously exempt under an abatement agreement. The amount includes the value of a property that had a portion of its value excluded because of a tax abatement agreement for all or a part of the property, less the value of the property included last year. New property value for tax abatements applies to agreements that are expiring and to agreements that have a declining percentage or amount of exemption each year.
Certain taxing units may include as new property value changes that increased a property's land value from the preceding year. In calculating the effective and rollback tax rates, the taxing units include as new property value from the preceding year the value added because the land was subdivided by plat; had water, sewer or drainage lines installed; or had paving of undeveloped land. The property's current year value would be increased for these changes and that added value would be considered "new" for the rate calculation. This provision applies only to taxing units created under Section 52, Article III, Texas Constitution or Section 59, Article XVI, Texas Constitution. It does not include new taxable value subject to a limitation agreement under Tax Code Chapter 313.
Taxing units participating in tax increment financing (TIF). A taxing unit excludes the taxes paid into a TIF and also excludes the portion of the captured appraised value that corresponds to the TIF payment in calculating both the effective and rollback rates.
The captured appraised value is the difference in value between the current appraised value and the base appraised value. The base appraised value is the value that existed at the time the TIF was created. The taxes on the base appraised value remain with the taxing unit. Only the portion of the captured appraised value that corresponds to the portion of the tax increment paid into the tax increment fund may be excluded in the rate calculations.
If a taxing unit does not have any TIF captured appraised value in the current year to exclude from the effective and rollback rate calculations, then it does not have any TIF taxes to exclude in those calculations. This provision addresses the situation when the taxable values in a TIF decline, rather than continue to increase.
The TIF captured appraised value to be deducted in the effective and rollback calculations does not include any value that was included as new property value in the calculations. This provision prevents a taxing unit from including the same value in two different deductions in the calculations.
Dividing the adjusted 2007 taxes by the adjusted 2008 taxable values and multiplying by $100 produces the 2008 effective tax rate, as illustrated in Exhibit 2 on the following page.