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. 1 The type of taxing unit determines which truth-in-taxation steps apply.
Cities, counties and hospital districts may levy a sales tax specifically to reduce property taxes. 2 In which case, the taxing unit reduces its effective and rollback tax rates to offset the expected sales tax revenue.
Any taxing unit may increase its rollback tax rate for M&O funds used to pay for a facility, device or method for the control of air, water or land pollution. 3 The taxing unit must provide its tax assessor with a copy of a determination letter from the Commission on Environmental Quality stating the portion of the cost of the installation for pollution control. 4
Water districts generally do not come under provisions of the Tax Code, but instead are governed by the Water Code. Water Code Sections 49.107(g) and 49.108(f) provide that Tax Code Sections 26.04, 26.05 and 26.07 do not apply to taxing units created under Water Code Section 49.001 that levy and collect taxes under Water Code Section 49.107 or 49.108. Information regarding water district calculations can be found in the Water District Rollback Tax Rate section below.
By providing the information below, the Comptroller's office provides technical assistance and not legal advice. Taxing unit should consult legal counsel for interpretations of law regarding tax rate calculations.
The effective tax rate enables the public to evaluate the relationship between taxes for the prior 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. 5
To do this, several adjustments must be made. Those adjustments are found in section 1 one of the Comptroller's sample tax rate calculation worksheets. The formula assumes that if values increase, the tax rate should decrease to create the same amount of revenue as it did the year before, or if values decrease, the tax rate must increase to produce the same amount of revenue. 6
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. 7 The taxing unit's tax assessor determines the following information:
The tax assessor submits all of this information to the taxing unit's governing body or to the school board. The governing body or school board designates an officer or employee (often the tax assessor-collector, but not necessarily) to calculate the effective tax rate and the rollback tax rate. 9
Calculating the effective tax rate requires the prior year's taxes and the current year's taxable value for property taxed in both years. 10 Dividing the taxes by the value (and multiplying by 100 to convert to a rate per $100 of value) produces the effective tax rate. 11 [See Tax Rate Calculation Example 1 (PDF)]
School districts with Tax Code Chapter 313 limitation agreements should seek legal counsel to determine if additional steps are necessary when calculating the effective tax rate.Last Year's Taxes Less Taxes on Property Lost This Year
To calculate the effective tax rate, a taxing unit must first determine its total taxes for the prior year. These totals include all supplements and corrections that have occurred to the tax roll since the prior year's certification and tax rate adoption except corrections ordered pursuant to Tax Code Section 25.25(d) for late appraisal roll changes ordered by the appraisal review board (ARB). 12 Including Tax Code Section 25.25(d) corrections in the tax rate calculations for the current year would result in lower effective and rollback tax rates for the taxing unit.
Taxing units required to refund taxes for tax years previous to the last year must include the refunded taxes in last year's debt levy and total refunded taxes in last year's levy. 13 Taxing units include all types of refunds for years before the prior year - court decisions, corrections and payment errors - for tax years preceding the tax year.
Any court-ordered refunds made in the prior year must be included as a separate step in the tax rate calculation. 14 A taxing unit may increase the last tax year's taxes to reflect lost taxes in the last tax year because a court overruled an ARB decision with a lower taxable value. Including these refunds in last year's levy results in higher effective and rollback tax rates that give taxing units the ability to recapture revenue removed from last year's taxes to return money to taxpayers.
Taxing units must reduce last year's total taxes for the amount of lost property levy. This is the amount of taxes levied on property value that was taxable in the prior year, but not in the current year. 15 Property value not taxed in the current year may have been deannexed by the taxing unit, received a new exemption or qualified for special appraisal in the current year.
Property that first qualified for a new exemption does not include freeport property or goods-in-transit property. 16
If a county, city or junior college adopted the tax ceiling provision in the prior tax year or a prior tax year for homeowners age 65 or older or disabled, the taxing unit adjusts last year's value by subtracting the value of homesteads with tax ceilings. Subtracting the value lost because of the changes described above, results in the taxing unit's adjusted taxes for the prior tax year. 17Current Value of Property Taxed in the Prior Year
Before calculating its effective tax rate, a taxing unit must adjust the current tax year values. 18 The taxing unit begins with the total taxable value on the certified appraisal roll and adds the value of properties still under protest or known, but not appraised for the current tax year. 19 The taxing unit then subtracts the value of new property - property annexed since Jan. 1 of the prior tax year and improvements new to the current year's tax roll. 20 This adjusts the current year's taxable values to include only property taxed in the current tax year and the prior tax year.
If a county, city or junior college adopted the tax ceiling provision in the prior tax year, the current year's values are adjusted by subtracting the current year's values of homesteads with tax ceilings for both age 65 or older and disabled homeowners. 21 In addition, a taxing unit excludes the taxable value of property exempted for the current tax year for the first time as pollution control property. 22Properties 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 and the taxpayer's estimated values. 23 In calculating the effective and rollback tax rates, the taxing unit uses the lower taxable value. 24
If the property owner did not estimate a value, the chief appraiser must estimate the outcome of the ARB appeal. The following two rules govern this estimate.
The chief appraiser must give taxing units a list of taxable properties that the chief appraiser knows about, but that are not included on the certified appraisal roll. These properties are not on the list of properties that are still under protest. 26
The chief appraiser includes the market value, appraised value and exemptions for the prior year and a reasonable estimate of the market value, appraised value and exemptions for the current year. A taxing unit's tax assessor must use the lower of the market, appraised or taxable value for computing the taxing unit's effective and rollback tax rates. 27New Property Value
The taxing unit deducts new property value from the current year's appraised values in the effective tax rate calculation.
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 of the prior tax year. 28 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 of the prior tax year. 29
New property value also includes property value in the current year that was previously exempt under an abatement agreement. 30 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 include value changes that increased a property's land value from the preceding year as new property. This includes land value that increased from the prior year because the land was subdivided by plat; had water, sewer or drainage lines installed; or had paving of undeveloped land. 31
Taxing units other than school districts exclude the taxes paid into a TIF and the portion of the captured appraised value that corresponds to the TIF payment in calculating both the effective and rollback tax rates. 33
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 TIF fund may be excluded in the tax rate calculations.
If a taxing unit does not have TIF captured appraised value in the current year to exclude from the effective and rollback tax 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 do not include any value that was included as new property value in the calculations. 34 This provision prevents a taxing unit from including the same value in two different deductions in the calculations. [See Tax Rate Calculation Example 3 (PDF)]Consolidated Taxing Units
A taxing unit that was two or more taxing units in the last year handles the effective and rollback tax rate calculations differently. The consolidated taxing unit combines the previous year's taxes for each taxing unit and divides them by the total values for the current year for the new consolidated taxing unit. 35
The rollback tax rate calculation splits the tax rate into two separate components - a maintenance and operations (M&O) rate and a debt service rate. 36 M&O includes such things as salaries, utilities and day-to-day operations. Debt service covers the interest and principal on bonds and other debt secured by property tax revenues. 37 The rollback tax rate is the sum of M&O and debt service rates. 38 In most cases, the rollback tax rate exceeds the effective tax rate, but occasionally decreases in a taxing unit's debt service will cause the effective tax rate to be higher than the rollback tax rate.M&O Rate
For school districts, the M&O portion of the rollback tax rate allows school districts to add four cents ($0.04) to the lesser of the current year's compressed operating tax rate or the effective M&O rate to generate operating funds. School districts will get to add any additional cents approved by voters at a 2006 or subsequent rollback election to the compressed operating rate. 39 [See Tax Rate Calculation Example 4 (PDF)]
For other taxing units, the M&O portion of the rollback tax rate is the tax rate that would be needed to raise the same amount of taxes that the taxing unit levied in the prior year plus eight percent. 40
Other taxing units calculate an effective M&O rate by taking the adjusted prior year's total taxable value used to calculate the effective tax rate and multiplying it by the prior year's M&O rate, and then dividing the product by $100 to get the adjusted prior year's M&O taxes. The prior year's M&O taxes are then divided by the adjusted current year's taxable value to get the current year's effective M&O rate. The rollback M&O rate is the effective M&O rate multiplied by 1.08. 41 [See Tax Rate Calculation Example 5 (PDF)]
Some taxing units must perform special steps that allow them to adjust their rollback tax rates. Many of these adjustments provide for a higher rollback tax rate.
County Criminal Justice Mandate
Counties may increase their rollback tax rate to replace funds spent to house prisoners sentenced to state correctional facilities. 42 The amount spent by a county includes the cost during the previous 12 months to keep inmates in county-paid facilities after they have been sentenced to a Texas Department of Criminal Justice facility. 43
The county auditor certifies the amount, based on information provided by the county sheriff, minus any amount received from the state for reimbursement. If the amount is the same or less, the county does not adjust the M&O rate. The county continues to use the same 12-month period in subsequent years.
For more information on this mandate, contact the Texas Commission on Jail Standards.
Taxing Units Transferring a Function
If a taxing unit discontinues all of a department, function or activity and transfers it to another taxing unit by written contract, the two taxing units must adjust their M&O rates for the transfer. The taxing unit discontinuing the function subtracts the amount spent for the function in the 12 months preceding the month of the rollback tax rate calculation. If the taxing unit did not operate this function for this 12-month period, the discontinuing taxing unit uses the amount spent in the last full fiscal year in which the taxing unit operated the function. The taxing unit receiving the function adds this amount to the rollback tax rate for the function's expenses. 44
Additional Rollback Protection for Enhanced Indigent Health Care Expenditures
A taxing unit other than a school district can increase its rollback tax rate to generate funds it will spend for enhanced indigent health care expenses. Enhanced expenditures are defined as the amount spent by the taxing unit for M&O costs of providing indigent health care at the increased minimum eligibility standards. The taxing unit deducts any state assistance received for these expenses.
To calculate the effective M&O rate for the current tax year, a taxing unit's enhanced indigent health care expenditures for the prior tax year are computed by subtracting the taxing units increased expenditures from July 1 of the year preceding last year through June 30 of last year and the amount of any state assistance from the enhanced expenditures for the current year (July 1 of the prior year through June 30 of the current year). Any remaining amount is the increased amount for the current year. 45
Tax Increment Financing (TIF)
Taxing units other than school districts exclude the taxes paid into a TIF and the captured appraised value that corresponds to the TIF payment in calculating the rollback tax rate. 46. The TIF adjustment amount is the same for the effective and rollback tax rates.
The debt service rate portion is the tax rate necessary to pay the taxing unit's debt payments in the coming year. This part of the calculation does not depend on the last year's debt taxes at all; it considers the amount the taxing unit will need for the current year. 47 The debt service portion of the overall tax rate may rise as high as necessary without triggering the threat of a rollback election.
This step concerns the actual debt payments required for the current fiscal year, not the last fiscal year's debt. Remember that these are debt payments that the current year's property taxes will pay. 48 A taxing unit that pays debt with other funds should not include those payments in the calculation.
School districts are required to consider the amount of facilities state aid (Existing Debt Allotment and/or Instructional Facilities Allotment) they will receive in setting their local debt service rates. 49 Doing so reduces the amount of debt that school districts pay from local funds and produces a lower debt service tax rate. School districts that do not take the state funding into account will both violate state law and levy rates that are too high.
Anticipated and Excess Debt Collections
A taxing unit that levies a debt service tax must consider anticipated collections in calculating the debt service component of its rollback tax rate. The collector for such a taxing unit must certify the current year's estimated debt collection rate and last year's excess debt tax collections to the governing body or school board. 50
Adjustments to the current year's debt service rate include excess collections from the previous year and the anticipated collection rate for the current year. 51 The taxing unit subtracts the amount of last year's excess debt tax collections from the current year's debt payments and divides the resulting figure by the anticipated current year's collection rate. 52 If the anticipated current year's collection rate is less than 100 percent, this will increase the amount of levy needed to pay debt service. The taxing unit's tax collector certifies the excess debt tax collections and the anticipated collection rate. 53
Estimated Debt Collection Rate for Current Tax Year
To find the estimated collection rate, the collector must first estimate the taxing unit's total debt collections from July 1 of the current year through June 30 of the next year. 54 This estimate equals the total tax dollars that will be collected for current debt taxes, delinquent taxes, special appraisal rollback taxes, penalties and interest. 55 The collector will not know the precise amount until this collection period is completed. Truth-in-taxation laws, however, require the collector's estimate. The collector compares this amount to what the taxing unit plans to levy for paying debt service in the current fiscal year.
Dividing the estimated collections by the required debt payments gives the estimated collection rate. 56 For example, the collector projects the taxing unit will take in $950,000 in debt revenues before July 1 of next year. The taxing unit's budget calls for it to levy $1 million in debt service taxes for the current year. The anticipated collection rate is $950,000 divided by $1 million, or 95 percent.
Using an anticipated collection rate of less than 100 percent in the calculations creates a higher debt levy. If the collector's anticipated collection rate exceeds 100 percent, the collector uses 100 percent in the calculation. Delinquent taxes from prior years may generate more than a 100 percent rate. 57
Excess Debt Tax Collections for Prior Year
The law requires the collector to compare the amount of taxes actually collected in current taxes, delinquent taxes, special appraisal rollback taxes, penalties and interest for last year's debt from July 1 of last year through June 30 of the current year. The collector compares this collected amount with the amount that the collector estimated to collect according to last year's anticipated collection rate. If the taxing unit took in more debt tax dollars than the estimated collection, the collector certifies the amount of excess debt tax collections to the governing body. 58
For example, last year the collector projected a collection rate of 95 percent and the governing body levied $500,000 in debt service taxes. The anticipated debt tax collections last year were $475,000 (.95 x $500,000). The collector determines whether the total amount of debt service taxes collected from July 1 of last year through June 30 of the current year exceeds $475,000 and determines the amount of any excess. If the taxing unit collected $485,000 in debt service taxes last year, the collector certifies excess debt tax collections of $10,000. The taxing unit subtracts this $10,000 from the current year's debt payments to lower the current year's debt service rate.
If the collector projected a collection rate of 100 percent for last year and collected more than 100 percent, the collector may certify excess debt collections of zero. Dividing the adjusted debt payments by the current year's total taxable values, times $100, gives the debt service portion of the rollback tax rate. [See Tax Rate Calculation Example 6 (PDF)]Total Rollback Tax Rate
Totaling the M&O rate and the debt service rate gives the total rollback tax rate. 59
Cities, counties and certain hospital districts may levy a sales tax specifically to reduce property taxes. 60 In each case, the taxing unit reduces its effective and rollback tax rates to offset the expected sales tax revenue. 61Timing a Sales Tax Election
Local voters by election must approve imposing or abolishing the additional sales tax. 62 Elections may be held on either of the two general election dates held in May or November. 63 If the additional sales tax to reduce property taxes passes, the taxing unit may use Section 3 of the Comptroller's Sample Tax Rate Worksheet to calculate the reduced effective and rollback tax rates.
Collecting the sales tax begins on Oct. 1 following the first full quarter after the taxing unit notifies the Comptroller's office of the election results. 64Impact on Effective and Rollback Tax Rates
A taxing unit that adopted the additional sales tax in November of the previous year or in May of the current year must adjust both its effective and rollback tax rates. A taxing unit that adopted the tax in prior years, however, adjusts only its rollback tax rate. 65Steps for First Year
A taxing unit that adopted the additional sales tax in November of the previous year or in May of the current year makes a first-year adjustment to both the effective and the rollback tax rates. The taxing unit computes an additional tax rate based on an estimate of sales tax revenue and subtracts that rate from the effective and rollback tax rates. The adjustment rate is called the sales tax gain rate. 66The Sales Tax Gain Rate
To calculate a sales tax gain rate for the first time, the taxing unit must first contact the Comptroller's office to obtain an estimate of the last four quarters' total dollar-volume of business activity subject to sales tax. It then multiplies that estimate by the adopted additional sales tax rate (usually .005), and multiplies that by 95 percent. By using 95 percent, a conservative amount is used to offset low first-year estimates of the total taxable sales. The taxing unit then divides the sales tax estimate by current year's total taxable values. 67 [See Tax Rate Calculation Example 7 (PDF)]
A county excludes the amount of sales tax revenue that is or will be distributed by the county for economic development grants. 68 The county subtracts this amount from the total estimated sales tax revenue in the first-year tax rate calculations.
Subtracting the sales tax gain rate from the effective tax rate and the rollback tax rate adjusts those tax rates for the anticipated additional sales tax. 69 [See Tax Rate Calculation Example 8 (PDF)]Steps for Following Years
Once a taxing unit has collected the additional sales tax for a year, its property tax revenues will reflect any tax rate reduction arising from the additional sales tax. As a result, calculating the effective tax rate will not require an adjustment for the additional sales tax.
Calculating the rollback tax rate after the first year, however, uses the last year's sales tax revenue in calculating the maintenance and operations (M&O) component of the rollback tax rate. The taxing unit subtracts a sales tax adjustment rate. 70 [See Tax Rate Calculation Example 9 (PDF)]Sales Tax in the Maintenance and Operations (M&O) Rate
To calculate the effective M&O rate, add the last year's sales tax revenue spent on M&O to the adjusted M&O levy. 71
The last year's sales tax revenue is the amount from the first full year of sales tax revenue spent for M&O. 72 This adjustment is necessary to properly account for sales tax revenue received in the preceding year. If this component were not added, the sales tax adjustment would not properly reflect the change in sales tax revenue from one year to the next.
A county excludes the amount of sales tax revenue that was distributed by the county for economic development grants. 73 The county subtracts this amount from the sales tax revenue spent in the calculation of the county's effective M&O rate.Sales Tax Adjustment Rate
After the first year, the sales tax adjustment rate is based on actual sales tax collections in the previous four quarters. As in the first year, the Comptroller's office supplies this amount on request. 74 Unlike the first year, there is no 95 percent adjustment. To calculate the sales tax adjustment rate, the taxing unit must divide the additional sales tax revenue from the last four quarters by this year's total taxable values. 75 [See Tax Rate Calculation Example 10 (PDF)]
A taxing unit can get its historical summary of monthly local sales and use tax allocation payments on the Comptrollers' Allocation Historical Summary website.Changing the Additional Sales Tax Rate
If the taxing unit either increases or decreases the sales tax rate from last year, the taxing unit must perform an additional step to determine the projected sales tax. 76
If the sales tax rate increased (for example, from $0.0025 to $0.005), the taxing unit must have two sales tax projections. The first projection uses the increased rate; the second projection does not. The difference between the two projections is the extra revenue generated by the rate increase. In the first year that the rate changed, the effective tax rate is the rate before the increase, less a rate for the extra revenue. To determine the revenue gain rate to subtract, divide the revenue gain by the current total property values (less new property value). 77
If the sales tax rate decreased (for example, from $0.005 to $0.0025), then the taxing unit has two sales tax projections - the first on the new decreased rate and the second on the old rate. The difference between the two projections is the revenue loss for the rate change. In the first year that the rate changed, the effective tax rate is the rate before the decrease, plus a rate for the revenue loss. To determine the revenue loss rate to add, divide the revenue loss by the current total property values (less new property value). 78
Taxing units should contact legal counsel for special instructions on calculating the sales tax projection for the first year after a sales tax rate change.Abolishing the Additional Sales Tax
If voters abolish the additional sales tax to reduce property taxes, the taxing unit adjusts its effective tax rate upward by adding a sales tax loss rate. To calculate this rate, the taxing unit divides sales tax revenues for the last four quarters by the current year's property value. It then adds the result in calculating the effective tax rate. 79 [See Tax Rate Calculation Example 11 (PDF)]
In the tax year in which a city has set an election on the question of whether to impose a local sales and use tax for mass transit, the city may not make effective and rollback calculations until the outcome of the election is determined. If the election is determined in favor of the imposition of the tax, the city must subtract from the city's rollback and effective tax rates the amount that, if applied to the city's current total value, would impose an amount equal to the amount of property taxes budgeted in the current tax year to pay for expenses related to mass transit services. 81
A city must make a one-time adjustment to its effective and rollback tax rates in the year it elects to impose a transit tax.
In general, instead of subtracting a sales tax adjustment rate, these cities subtract a mass transit expense rate. The city divides the amount budgeted in property taxes for mass transit expenses in the current year by the total taxable value. [See Tax Rate Calculation Example 13 (PDF)]
Mass transit services do not include the construction, reconstruction or general maintenance of municipal streets. 82
A taxing unit or school district may increase its rollback tax rate by the rate that generates the amount of funds the taxing unit spends for pollution control property, divided by the taxing unit's current total value. Section 4 of the Comptroller's Sample Tax Rate Calculation Worksheet provides information needed for calculating the additional tax rate to add to the rollback tax rate.
A taxing unit may raise its rate for M&O funds used to pay for a facility, device or method for the control of air, water or land pollution. 83 This includes any land, structure, building, installation, excavation, machinery, equipment or device that is used, constructed, acquired or installed wholly or partly to meet or exceed pollution control requirements. 84 The taxing unit's expenses are those necessary to meet the requirements of a permit issued by the Texas Commission on Environmental Quality (TCEQ). 85
The TCEQ executive director issues a determination letter stating the portion of the cost of the installation for pollution control. 86 The taxing unit must provide its tax assessor with a copy of the TCEQ letter. 87 The tax assessor must accept the copy stating the cost of the pollution control property as conclusive evidence and shall adjust the rollback tax rate. 88 Taxing units should check with TCEQ's Air Quality Division for rules regarding this process.
Water Code Section 49.001 defines a water district as any district or authority created by Texas Constitution, Article XVI, Section 59 or Article III, Sections 52(b)(1) and (2), but does not include:
Water Code Sections 49.107(g) and 49.108(f) provide that Tax Code Sections 26.04, 26.05 and 26.07 do not apply to taxing units created under Water Code Section 49.001 that levy and collect taxes under Water Code Sections 49.107 and 49.108. Questions regarding the applicability of the Tax Code or the Water Code to a taxing unit should be directed to an attorney or other appropriate counsel.Rollback Tax Rate
The rollback tax rate is the highest rate the water district may adopt without authorizing qualified voters to petition for a rollback election. 90 The rollback rate is the current year's debt service and contract tax rates, plus the M&O rate that would impose no more than 1.08 times the amount of M&O tax imposed by the water district in the preceding year on the average appraised value of a residence homestead in the water district. 91 The average appraised value disregards any homestead exemption available only to people with disabilities or those age 65 or older. 92