Understanding the Effective Tax Rate

The Effective Tax Rate is an important concept in both property taxes in general, and in the Texas Truth in Taxation act. The truth in taxation act basically requires that a taxing jurisdiction (any one levying property taxes) publish an effective rate each year, so that people have a way to tell if the entity is raising property taxes or not.

You need a basic understanding of property taxes to understand the effective tax rate. The Texas Comptroller has an entire section about property taxes, and I previously published a post on understanding property taxes. The most important thing to get from those discussions is that property taxes are levied in the aggregate, that is, on all the property in the city (or county/ISD - I am focused on cities).

Since taxes are levied on the total property in the city, if the total value of property goes up, then if the tax rate remains the same, the total property tax revenue for the city goes up.  Then there is the concept of existing property and new property. Existing property is property that is on the tax rolls in the current year and that was on the tax rolls in the previous year. New property is property that was not on the tax rolls in the previous year that is on the current year's tax roll. The value of existing property is used to calculate what the state calls the effective tax rate.

The effective tax rate levies the same tax on existing aggregate property value in the current year as was levied on the same properties in the previous tax year. At least that is the theory on the surface. In actual fact, as with all things state and/or government driven, the actual rules make things needlessly complex and hard to understand. Nevertheless, I offer the Effective Tax Rate (ETR) calculations for a couple of years.

For the 2010 fiscal year, the calculations go like this:

2009 AV Value	$1,396,161,939
2009 Tax Rate	$0.576980/$100
2009 Tax Levy	$8,057,157
2010 AV Value (property from 2009)	$1,358,891,199
2010 Effective Tax Rate	$0.59292/$100
2010 Tax Levy (property from 2009)	$8,057,138
2010 AV Value (new property for 2010)	$9,551,733
2010 Tax Levy (new property for 2010)	$56,634
Total 2010 Tax Levy (all property for 2010)	$8,113,772

So here is the takeaway from this exercise - the value of existing property from 2009 to 2010 went down -$39,270,740, or about 2.8% and the effective tax rate was about 2.8% higher, and the taxes levied in 2009 were about equal to the 2010 taxes on property that existed in 2009. Yes, there was about a 20 dollar difference - that's a rounding error! The 56 thousand dollar increase in total taxes was due to the 9.5 million dollars in new property added to the rolls.

For fiscal year 2010, the effective rate was adopted for the budget. As a result, the 2011 effective tax rate calculations go like this:

2010 AV Value	$1,374,733,444
2010 Tax Rate	$0.59292/$100
2010 Tax Levy	$8,162,607
2011 AV Value (property from 2010)	$1,380,326,044
2011 Effective Tax Rate	$0.591353/$100
2011 Tax Levy (property from 2010)	$8,162,599
2011 AV Value (new property for 2011)	$10,081,656
2011 Tax Levy (new property for 2011)	$59,618
Total 2011 Tax Levy (all property for 2011)	$8,222,217

This time the 2011 property value is about 0.4% higher that 2010 - thus the corresponding effective tax rate is about 0.3% lower. The main point is that the 2011 levy on 2010 properties is within 8 dollars of the 2010 levy. Again, the additional taxes are due to new property added to the rolls in 2011.

Now, those watching very carefully and using their calculators to "check my work" will note some discrepencies, like that the 2010 tax levy is different than the result of multiplying the 2010 AV by the 2010 rate - simply put, the 9 lines above is a condensation of a 35 line form. The state likes to make things complicated.

Also, some will note the difference between the 2010 AV in the 2010 example, and the 2010 AV in the 2011 example. An ordinary person would not expect there to be any difference, but, again, the state is not run by ordinary people - the state likes to obfuscate things. The short version is that the 2010 example uses july 25, 2010 numbers, and the 2011 example uses july 25, 2011 numbers, and during the year the AV value for the prior year is constantly adjusted by court cases, appeals, and such.