Will Austin regret not raising taxes more?

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Yesterday’s surprisingly brief budget deliberations largely centered on one conversation: how much do we raise taxes? That’s hardly unusual, but the threat of the legislature limiting the city’s tax-raising ability in future years added an extra dimension to the perennial debate.

Gov. Greg Abbott has said he wants to reduce the rollback rate all the way down to 2.5%. I get the sense that few expect the legislature to OK such a dramatic decrease when far more modest proposals (to 4 or 5%) have not made it through in recent years. But it’s a threat that members of the Austin City Council are not taking lightly.

Here’s a quick primer on how local property taxes work. If you already know, skip it.

In Texas, cities are allowed to collect up to 8 percent more in property tax revenue than they did the previous year (8 percent is the rollback rate). If they collect more than that, then voters have the right to petition for a rollback election. If voters choose to reject the tax increase in the referendum, then the tax rate goes back down to the rollback rate.

(Note, an 8 percent increase in property tax collection does NOT mean that the property tax rate has increased. Only that the total tax collected by the city has increased by that much as a result of higher property values, new construction etc. The actual tax rate this year, for instance, decreased)

Because of the threat from the legislature, the city’s financial staff essentially recommended that Council raise the rate as much as possible and put the unspent money into a rainy day fund to brace for the type austerity that a 2.5% or even a 5% rollback rate would demand in the coming years. Not only would putting the money into reserve provide a financial cushion, but it would set the city up to collect more revenue in future years because the rollback rate is based on how much revenue was brought in the prior year. To illustrate the point, under a 2.5% rollback rate, if property tax revenue totaled $10 this year then we would be able to bring in $10.25 the following year. But if we only raised $9.50 this year,  we would only be able to bring in $9.74 the next year. And continues year after year like that.

If the legislature finally makes good on its threat, most Council members WILL regret not raising taxes all the way up to the rollback rate this year. Yesterday, however, going up to the rollback rate was not even on the table, since Council had committed (as required by weird state laws) to go no higher than 6% last month. So the debate was whether to stay at the 4.9% recommended in the city manager’s proposed budget or go 1% higher.

However, yesterday, some Council members argued that the best way for the city to escape the legislature’s wrath would be to NOT raise taxes that much this year. Troxclair, who said that she supported efforts at the lege to lower the rollback rate, suggested Republicans wouldn’t put such a high priority on the policy if the city of Austin would show that it can “live within its means.”

The centrist Jimmy Flannigan made a similar case: “I think it would be far more prudent to approve the manager’s (4.9% increase) budget to show not just the legislature but the community that this 10-1 Council is evolving in a more responsible direction.” 

Others (Greg Casar comes to mind) clearly thought that trying to impress Greg Abbott was a fool’s errand and that the city would be better off stockpiling for Armageddon.

The most surprising thing was seeing Delia Garza and Pio Renteria taking votes against increasing the tax rate. Garza made a local political argument: if we want voters to approve the $925 million bond (which includes $250 million for affordable housing) we need to exhibit some fiscal discipline. Renteria didn’t really say much, except to bemoan the state for screwing over the city with its school funding formula.

One big question mark that nobody is talking about is the state legislative elections. Nobody in their right mind expects the Republicans to lose control of the legislature or the governorship this November, but if Democrats make some gains, then it may become even harder for Abbott and Patrick to engineer the rollback rate reduction that they’ve long sought.

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