Truth-in-Taxation: Tax Rate Adoption
Property owners have the right to know about increases in their properties' appraised value and to be notified of the estimated taxes that could result from the new value. Creating a budget and adopting a property tax rate to support that budget are major functions of a taxing unit's governing body. This is accomplished by following truth-in-taxation requirements to ensure the public is informed of any increases. Truth-in-taxation is a concept embodied in the Texas Constitution and the Tax Code that requires local taxing units to make taxpayers aware of tax rate proposals and to afford taxpayers the opportunity to roll back or limit tax increases.
Taxing units must comply with truth-in-taxation requirements when holding public hearings, considering budgets and setting rates to impose property taxes, but not all aspects of truth-in-taxation laws apply to every type of taxing unit.
If certain taxing units fail to comply with the hearing, notice or tax rate adopting process in good faith, a property owner in the taxing unit may seek an injunction to stop the taxing unit from sending tax bills until it convinces the district court that it has complied with the law. A property owner must act to enjoin collections before the taxing unit delivers substantially all of its tax bills. This injunction process does not apply to water districts or small taxing units.
A taxing unit that did not levy property taxes last year is not required to comply with truth-in-taxation laws in the current year, but the Comptroller's office recommends that it consider publishing similar notices and holding a public hearing to inform taxpayers of its intention to levy a property tax.
Generally, the governing body must take the following actions:
The taxing unit must identify its needs and draft a budget to meet those needs. To assist the taxing unit in this process, the chief appraiser prepares and certifies to the tax assessor, by April 30 (unless the date falls on a weekend or holiday), an estimate of the taxable value of property in that taxing unit. To determine the amount of property taxes necessary to fund that budget, the taxing unit must decide:
- the maintenance and operations (M&O) rate necessary for the general operating expenses (based on current year's values);
- the payments for debt service; and
- the amount of surplus funds, if any, it plans to expend to reduce its M&O or debt levies.
School district 2015 effective M&O and rollback tax rates are calculated based on a $25,000 residence homestead exemption under Tax Code Section 11.13(b). Tax officials are required to adjust school district tax ceilings of persons age 65 or older or disabled to reflect an additional $10,000 residence homestead exemption. For the 2015 tax year, chief appraisers are required to prepare supplemental appraisal records that reflect a $25,000 residence homestead exemption and school assessors are required to determine 2015 taxable values and tax rates based on a $25,000 residence homestead exemption.
Truth-in-taxation requires most taxing units to calculate two rates after receiving a certified appraisal roll from the chief appraiser - the effective tax rate and the rollback tax rate. The type of taxing unit determines which truth-in-taxation steps apply.
Effective Tax Rate
The effective tax rate is a calculated rate that would provide the taxing unit with about the same amount of revenue it received in the year before on properties taxed in both years. If property values rise, the effective tax rate goes down and vice versa.
Although the actual calculation can become more complicated, a taxing unit's effective tax rate is a calculated rate generally equal to the last year's taxes divided by the current taxable value of properties that were also on the tax roll last year. The resulting tax rate, used for comparison only, shows the relation between the last year's revenue and the current year's values.
Rollback Tax Rate
The rollback tax rate is a calculated maximum rate allowed by law without voter approval. A taxing unit's rollback tax rate is a calculated rate that divides the overall property taxes into two categories - M&O and debt service, also called interest and sinking.
With the exception of school districts, the rollback tax rate provides the taxing unit with about the same amount of tax revenue it spent the previous year for day-to-day operations, plus an extra eight percent increase for those operations, and sufficient funds to pay debts in the coming year. If a taxing unit adopts a tax rate higher than the rollback tax rate, voters in the taxing unit can circulate a petition calling for an election to limit the size of the tax increase.
School districts add four cents to the lesser of the compressed operating tax rate or the effective M&O rate to get their highest M&O rate. They then add the debt service rate to get the final rollback tax rate. To calculate the effective M&O rate, school districts should consult the Texas Education Agency.
For all taxing units, the debt service portion of the rollback tax rate is the current year's debt payments divided by the current year's property values. The debt service rate may rise as high as necessary to cover debt expenses.
The Tax Code requires some taxing units to publish their calculated effective and rollback tax rates or to mail them to each property owner. School districts, small taxing units, counties and cities and water districts are not subject to the notice requirements in the Tax Code, but are subject to publishing requirements specified by other statutes.
School districts must publish a notice before their public hearings as required by the Education Code. Counties and cities must meet publishing requirements in the Local Government Code. Water districts must comply with requirements defined in the Water Code. Small taxing units are allowed to file one simplified notice before adoption of a tax rate in compliance with Tax Code requirements or, if they are cities or counties, follow the notice requirements in the Local Government Code. All other taxing units are required by the Tax Code to publish multiple quarter-page notices regarding the public hearings and before the meeting scheduled for the vote to adopt a tax rate.
The taxing unit posts required notices on its website if it has one. A taxing unit must follow the wording and posting requirements regarding website postings. If the taxing unit has free access to a television channel, it must publish this notice as a 60-second message or announcement.
After publishing the required notice, taxing units must hold two public hearings. A quorum of the governing body must be present at both hearings. Taxpayers must have the opportunity to express their views on the increase at each hearing. The governing body may not adopt the tax rate at either of these hearings. At each hearing, the governing body must announce the date, time and place of the meeting at which it will vote on the tax rate. Public hearings must be held on a weekday, not a holiday. These hearing requirements do not apply to school districts, small taxing units or water districts.
The governing body must follow a strict timetable once it holds these public hearings. The meeting to vote on the tax rate must take place no less than three days and no more than 14 days after the second public hearing. Like the public hearings, the meeting to vote must take place in a public building inside the taxing unit's boundaries. The meeting to vote on the tax rate can take place on any day, including a holiday.
Small taxing units have no public hearing requirement. School districts and water district hold one public hearing.
The Tax Code requires that the governing body adopt the tax rate no less than three days but no more than 14 days after the second public hearing. Some taxing units must republish the second notice if the tax rate is not adopted during this time period.
Open Meetings Notices
The taxing unit must post notice of the meeting in compliance with the open-meetings law. The meeting must be open to the public.
Adoption of the tax rate must be a separate item on the agenda for the meeting. State law requires that most counties and general law cities adopt a budget before they adopt the tax rate. These taxing units may adopt a budget and a tax rate at the same meeting as long as the budget is adopted first as a separate item. Counties with a population of more than 225,000 are not required to adopt the budget before adopting a tax rate. Other taxing units should refer to their enabling legislation for specific guidance.
A taxing unit's governing body must adopt a tax rate by official action and set it out in a written resolution, ordinance or order using specific wording set out in the Tax Code. Each type of taxing unit needs to refer to its enabling legislation to determine the proper form for the official adoption of a tax rate.
A taxing unit authorized to pay both M&O and debt service with property taxes must adopt its rate as two separate components.
A county may have several tax rates, depending on the kinds of taxes it levies. Each of these rates should be broken down into M&O and debt service components.
Deadline to Adopt Rate
Other than a water district, a taxing unit must adopt its tax rate before Sept. 30 or by the 60th day after the taxing unit receives the certified appraisal roll, whichever date is later.
If a taxing unit misses the deadline, the governing body must ratify either the effective tax rate or last year's tax rate, whichever is lower, as the adopted tax rate before the fifth day after establishing that tax rate.
If a taxing unit adopts a tax rate that exceeds the rollback tax rate, voters in the taxing unit may petition for an election on the tax increase. A school district must automatically hold a tax rate ratification election (TRE) if the trustees vote to adopt a tax rate that exceeds the rollback tax rate.
The Texas Comptroller of Public Accounts provides technical assistance - not legal advice. Interpretations of law must be made by legal counsel representing governmental entities. Questions about the meaning of the statutes, notice requirements and other matters that are unclear in the law should be posed to legal counsel and not to the Comptroller's staff.