Thought Leadership

Unlawfully Inflated Tax Rates in Dimmit and Other Texas Counties

Client Updates
Several Texas counties have improperly adopted substantially increased tax rates based on erroneous calculations, and we believe taxpayers are owed property tax refunds. The deadline for paying county property taxes is January 31st. Taxpayers that want to contest tax payments should pay property taxes under protest. For those who have already paid without contest, we believe there are avenues available for refunds in this situation despite the general rule that prohibits refund claims on voluntary payments.

I.Truth in Taxation and Rollback Rates

Under Texas’s “truth in taxation” provisions, property tax revenue increases are subject to limits from one year to the next. If a county’s tax rate will result in more than 8% additional revenue as compared to the prior year, the county must alert voters. Voters can then petition for an election (“Rollback Vote”) to “rollback” the tax rate to one that caps revenue to an 8% increase (“Rollback Rate”). As property values increase, a county generally must decrease its rates to avoid a Rollback Vote. 

II.Transportation Reinvestment Zones (TRZs)

In 2013, the Legislature enabled counties to create TRZs in areas with appreciating oil and gas property. TRZs allow counties to calculate their Rollback Rate without accounting for appreciation inside the TRZ. In other words, when determining if the county will collect more than 8% additional revenue, taxes on TRZ appreciation are excluded. While TRZ appreciation is excluded when calculating the Rollback Rate, counties still tax this appreciation, resulting in “bonus revenue” used to improve infrastructure, while avoiding a Rollback Vote. 
Example 1 illustrates how a county with TRZs can collect more revenue than a county without TRZs without triggering a Rollback Vote. Without TRZs, the tax base for purposes of calculating the Rollback Rate (“Rollback Base”) doubles, resulting in almost half the Rollback Rate from Year 1. With TRZs, the Rollback Base is equal in both years because it excludes TRZ appreciation. A level Rollback Base results in a level Rollback Rate. But because TRZ appreciation is still taxed, the county collects twice as much revenue. This achieves the Legislature’s goal—forcing oil and gas companies to pay additional tax in order to compensate counties for road deterioration caused by oil and gas exploration activities.
III.Counties Have Illegally Inflated Tax Rates by Shifting Value into TRZs 
Since 2013, several counties have created TRZs. While property values have grown in these counties, tax rates, in some cases, have nearly doubled without triggering a Rollback Vote. How is this possible? County consultants have incorrectly managed TRZs—shifting value from outside the TRZs, to inside the TRZs.
Example 2 illustrates how inaccurately managed TRZs can permit counties to greatly inflate their tax revenues without triggering a Rollback Vote. Option A shows the expected effect of a TRZ (mirroring Example 1 above). Option B shows the increase in tax rate possible when value is shifted into the TRZ—shrinking the Rollback Base and inflating the Rollback Rate. 
IV.Counties That Have Improperly Increased Tax Rates Via Value Shifting
Dimmit County has inflated its rates in error in this way by mistakenly inserting certain non-TRZ assets into the TRZ, lowering the Rollback Base and increasing the Rollback Rate. A number of other counties have acted similarly, relying on the same consultant who manages Dimmit’s TRZs. The following chart shows to what extent Dimmit County has shifted value into TRZs.  
The county consultant’s accounting errors shifted over $1.7 billion of non-TRZ value into the TRZ, causing the county to miscalculate its Rollback Rate. Dimmit County thus claims its 95% tax rate increase falls under the Rollback Rate, but based on rough approximations using accurate TRZ and non-TRZ values, the rate is in-fact 85% higher than the Rollback Rate. Thus voters were entitled to, but denied, a Rollback Vote.

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