Texas governments facing historic rates of inflation and severe labor shortages

JASPER, Texas -- Every summer, Jasper County Judge Mark Allen begins to worry about two very different storms brewing: hurricanes and his county budget.

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Allen and thousands of other local government officials across Texas entered this year's budget season facing historic rates of inflation along with severe labor shortages. Complicating the budget process, counties and other taxing bodies say they can't raise taxes to cover the growing costs of employee salaries and raw materials because their hands are tied by public pressure and recent legislation.

"It's a situation where local governments are having to start siphoning off their emergency reserves, or just not be able to provide services to people," said Allen, who has been the East Texas county's top elected official for more than 15 years. "We're losing quality personnel to the private sector, where they go out and try to find better-paying jobs and better benefits."

In 2019, state lawmakers passed two pieces of legislation to address rising property taxes and, they said, to create more transparency for Texas homeowners. The bills, which were signed into law by Gov. Greg Abbott, require taxing bodies such as counties and cities to win voter approval if they want to raise property tax revenues more than 3.5% from the previous year's tax base. Under the new legislation, school districts are essentially limited to 2.5% growth in tax revenue each year.

That means that even though home values have skyrocketed, government bodies are not necessarily reaping the rewards of that growth.

Now, as counties, cities and school districts push to finalize their budgets before the start of the new fiscal year on Oct. 1, they face tough questions. Many are calculating whether it's worth seeking voter approval to raise tax revenues beyond the 3.5% cap. Others are choosing to adopt a so-called no-new-revenue tax rate to provide relief to taxpayers - many of whom are likewise struggling to adjust to a new economic reality of higher prices.

Jasper County, one of Texas' most eastward counties that has 35,000 residents, decided on the latter last week, approving a tax rate that will bring in the same amount of property tax revenue as the last budget. On average, most Jasper homeowners will see only minor changes to their bills from the county.

"We did that as an effort to keep the peace," said Allen, explaining that taxpayers were upset when they saw historic growth in the appraised values of their homes and assumed those higher values would translate to higher tax bills.

"The reality is that it's just getting harder and harder to operate," Allen said. "It's hard to look at your employees and say, 'Well, we know that the cost of living this year is 8.9% higher, but we're only going to be able to give you all a 2% cost of living adjustment.'"

More power for taxpayers

Local governments in Texas rely heavily on property tax revenue to pay for salaries of police officers and firefighters, as well as for government services including roads, libraries and public schools.

Unlike most other states, Texas does not have a state income tax, and property tax bills are among the highest in the nation.

Each year, appraisal districts assess home values and then notify homeowners of how much their houses are worth. Later, local governments decide how much money they will need to provide public services. They then set a property tax rate that will allow them to collect the amount of revenue needed. Some governments have access to additional sources of revenue - for example, school districts receive state and federal funds, and some counties receive sales taxes.

According to the comptroller's office, property tax collections have risen more than 20% since 2017.

"Historically, where there's been a big increase in the total assessed value, some taxing jurisdictions have just left their property tax rates the same as the year before," said Charles Gilliland, an economist at the Texas Real Estate Research Center. That results in huge increases in Texas homeowners' property taxes.

A pair of bills in 2019 tried to address this. House Bill 3, a school finance bill, included about $5.1 billion devoted to lowering Texans' property tax bills.

Senate Bill 2, meanwhile, limited most other taxing units to 3.5% revenue growth, unless a majority of voters approve a higher tax rate in an election. Before 2019, taxing entities could raise up to 8% more revenue each year. If a county wanted to go beyond that rate, voters could petition for an election to roll back the tax rate to one that would generate only 8% growth.

According to an assessment from the Texas Taxpayers and Research Association, a business trade group that concentrates on tax and fiscal policy, those two pieces of legislation have helped curb Texans' property taxes. In 2021, property tax bills totaled $73 billion. They would have totaled $79 billion without the legislation, according to the analysis.

Dale Craymer, president of the association, said that more important than these savings is the role voters now have in setting tax policy.

"The legislation gives the public a greater say in their property taxes," he says. "It gives the public a tool to constrain taxes."

Early successes in asking voters for more money

Some counties and school districts have successfully gone beyond the revenue growth limit with an election. Last year, Lubbock County voters approved a property tax hike to fund salary increases for sheriff's deputies.

This year, Lubbock County approved the maximum tax rate it could set without triggering an election.

"If you keep jumping everybody's taxes by 8% every year, that's a problem," said Lubbock County Commissioner Jason Corley. Corley voted against this year's proposed tax rate, saying he wanted to keep tax rates even lower.

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Still, counties have had to get creative when it comes to figuring out how to provide the same level of service to their constituents amid price increases and labor shortages, he said.

"People are saying, 'I can't hire a plumber,'" Corley said. "Well, I can't hire a lawyer in the DA's office either."

Lubbock has found cost savings in employee benefits by relying on private contractors. The West Texas county also saved on utility costs by having certain court hearings virtually instead of in air-conditioned courthouses.

Several school districts, including Fort Bend Independent School District and Katy ISD, have decided to hold property tax rate elections in November to bring in more revenue.

Other school districts have adopted budgets that include millions of dollars in deficits. Lufkin ISD's board of trustees last month adopted a $4.3 million deficit for its new budget.

"With inflation and higher costs, our dollars are not stretching as far as we need them to," Charlotte Bynum, chief financial officer for Lufkin ISD, said in an email. "Our goal is to hire teachers and compensate them well, but with all the costs that seem to be increasing every budget year, it is challenging."

State Sen. Paul Bettencourt, the Houston Republican who authored the local government tax cap, has called out school districts holding tax-rate elections, saying they shouldn't need to take more dollars from voters this year.

"I reject the premise that they are being squeezed," said Bettencourt, noting that school districts received additional state dollars and even more money from the federal government during the COVID-19 pandemic.

Bettencourt also emphasized that cities and counties can generate more than 3.5% annual growth through new property developments, which are excluded from the 3.5% calculation.

"SB-2 was designed to function in a low inflationary time and a high inflationary time," he said.

Craymer, the tax policy executive, said it would be reasonable for the state to adopt a higher revenue threshold during years when inflation is particularly high.

"I'm certainly sensitive to local jurisdictions' concerns about inflation," he said.

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