Understanding the effective tax rate: A voter's lesson

by Crystal Gottfried, Staff Writer

In order to understand the commotion surrounding the 2-cent Comal County tax rate increase that made taxpayers go out to sign a petition for a rollback election with less than a penny of tax increase hanging in the balance, a lesson is needed about the effective tax rate.

The explanation is really quite simple, and according to Comal County Tax Collector Sherman Krause, the effective tax rate is the rate that generates the same amount of revenue as it did the year before on the same property. Additionally, it serves as public notice that the county's tax rate has changed from the previous year.

Let's say that in Year 2, the county has $1 billion in taxable properties and the budget for county services is adopted at $10 million. The county sets the tax rate at $1 per $100 assessed valuation on the $1 billion in taxable properties and raises $10 million to fund the budget.

The County uses Year 1 tax revenues to pay for its current Year 2 expenditures. All counties use the previous year's tax revenues to operate in the current year.

In Year 3, the county's appraisal district raised the value of its taxable properties, and several new housing developments increased the community's service needs. The county's taxable property values have risen to $2 billion.

The budget for the county's services is adopted at $10 million, because there was moderate growth, no expansion, no unfunded state mandates, and no emergency expenditures. To raise the same amount of taxes in 2004 as were raised in 2003, the county's effective tax rate becomes $.50 per $100 assessed valuation.

This means that the county only needs to charge $.50 per $100 assessed valuation to raise $10 million to fund their 2004 budget.

If the county were to leave the tax rate at $1.00 per $100 assessed valuation on the $2 billion in taxable property, they would raise $20 million in tax revenues.

The effective tax rate calculation would serve as public notice that the county only needs to charge $.50 per $100 assessed property valuation to fund their $10 million budget.

Realistically, very few, if any, Texas counties remain stagnant. Counties grow, develop, expand, progress and increase in services to meet that growth.

In the real world, just like in a business, a county budget is an approximation of what it would cost to run the county for the next year. The budget is based on current and projected costs of the community's needs, using numerous factors ranging from state mandated, unfunded costs like health and legal services for the poor, to taxpayer-funded costs of law enforcement to protect its citizens and maintain law and order, and road maintenance so county citizens and visitors can travel safely. Then the county must include the employment costs of the hundreds of people that administer the services to meet the needs of the community.

To carry the effective tax rate lesson one step further, the county is actually growing quite rapidly with new housing developments springing up everywhere. The county's school district needed to put out a bond issue to raise $189 million to build more schools and to educate all the kids from the new neighborhoods. The county's budget actually grew to $20 million for 2004.

The effective tax rate is still $.50 per $100 of assessed valuation; the amount that would raise the same amount of tax revenues as in 2003. The tax rate to fund the 2004 budget would need to be $1.00 per $100 assessed valuation.

State law allows taxpayers to call for a rollback election if the effective tax rate goes over 8 percent of last year's tax rate.

So what are county's officials to do? Do they cut the 2004 budget and reduce services to compensate for the increased costs of doing business due to growth in the county, unfunded state mandates and increases in gasoline and insurance costs? Or, do they try to meet the ever-increasing demands for services in the county?

Do the math.

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