Tuesday’s Senate Finance Committee interim hearing, led by State Sen. Jane Nelson (R-Flower Mound), brought with it the reemergence of a familiar topic: property taxes.
Specifically, the focus was on business property taxes.
Article 8, Section 1, Subsection (b) of the Texas State Constitution states: “All real property and tangible personal property in this State, unless exempt as required or permitted by this Constitution, whether owned by natural persons or corporations, other than municipal, shall be taxed in proportion to its value, which shall be ascertained as may be provided by law.”
The business personal property (BPP) tax — not to be confused with the overall ad valorem tax that was the subject of SB 2 and HB 3 this past session, of which BPP is one component — is a tax on the value of a business’ inventory and equipment.
For example, a pizza restaurant receives an annual valuation on its oven, which is then taxed at the established rate. It’s important to note that tax revenue will have already been collected on the oven through sales tax — as well as a sales tax on every pizza sold.
Exemptions exist, most notably, for pieces of personal property that are “not held or used for the production of income and personal effects not held or used for the production of income.”
For a standard office, however, it does include items such as desks, chairs, and any other standard piece of equipment used in the business process.
But recently, the state government has looked at creating additional exemptions rather than nixing the entire BPP.
Local governments use the BPP tax to finance things they want or need. And because of this, businesses pay property tax on a much wider scope than individuals do.
Russell Schaffner, the assistant country administrator for Tarrant County, stated in his testimony that 13 percent of Tarrant County’s revenue comes from the BPP tax.
He called it an “important part of Tarrant County’s tax base.”
Schaffner then noted that of Tarrant County’s potential BPP taxable value, 38 percent of industrial and 29 percent of commercial business’ value is exempted.
Schaffner is worried that an adjustment in the BPP tax system would shift the burden elsewhere, most notably to the residential side — which he said, in Tarrant County, pays 60 percent of the total property tax revenue.
Bennett Sandlin, executive director of the Texas Municipal League (TML) — an organization that represents local governments in front of the legislature — told The Texan, “We would be opposed to exempting the entirety [of what would be subjected to] the business personal property tax.”
Sandlin stated TML’s concern is just how much tax revenue would be lost should it be abolished.
Sandlin also stressed this is a bigger overall issue for counties compared to cities since most large businesses and industries operate outside of city limits.
BPP is fully taxable in 38 states and most inventories are exempt in 36 states.
Texas is one of a few states that taxes both.
President of the Texas Taxpayers and Research Association, Dale Craymer, told The Texan, “It’s a tax you have to pay in Texas that you don’t have to pay anywhere else.” Craymer calls this a “competitiveness issue.”
While Texas is booming economically and has a relatively low regulatory barrier, Craymer believes that in this one field, Texas is hindering its ability to attract businesses.
Regarding the BPP, Craymer added, businesses can respond in one of three ways: move elsewhere, be content with making a lesser profit in Texas, or passing the cost onto consumers by raising the prices of their goods and services.
Craymer pointed to the accomplishments of the 86th Legislature limiting property tax rate growth as a significant fix for the overall property tax problem.
“I don’t think the problem [of rising property taxes] Texas taxpayers have seen over the past several years are necessarily going to continue moving forward for the foreseeable future [because of SB 2 and HB 3],” Craymer stated.
Craymer would like to see the property tax system for businesses narrowed, which he sees as “a barrier to new investment.”
This could include more exemptions, finding a way to constrain rates, or limiting valuations — but he does not see full abolishment of the tax as a feasible option.
“All or any of those would be a net benefit to all taxpayers,” Craymer concluded.
One person who does want to see the BPP abolished is Corsicana city councilman Chris Woolsey. Testifying in front of the committee, he called the BPP “a broken system” which requires business owners to “pay a yearly tribute on the equipment and inventory they own.”
He also questioned the appraisal process, calling many of the valuations “arbitrary values assigned to industry-specific machinery or family heirloom office equipment that have no uniform standard of measurement.”
Valuations are often not as simple as pulling up a Kelly Blue Book-like database. For equipment that is not-so-standard, valuing them can become glorified guesswork.
Taking a hard stance on the BPP, Woolsey called the tax “little more than a rent payment for operating a business.” This creates a system in which “individuals never really own their business equipment — the government does.”
Arlen Swartzentruber, who owns B.E.A.R. gun shop in Corsicana, told The Texan, “While it doesn’t come out to a large sum of money, it’s more the principle of the matter.” Swartzentruber called it an unfair tax and likened it to “taxation without representation” since few people pay it, let alone know what it is.
One business owner who has seen the cost aspect become burdensome is Philip Taft, a psychologist in Corsicana. He’s owned the business since 2001.
Taft told The Texan his BPP tax bill floated between $600 and $1,000 since he started, but then this year it jumped exponentially to $10,000.
Taft said his equipment has only negligibly changed since he started, yet his BPP tax bill increased over 1,000 percent.
The appraisal can be challenged, but Taft called it “a disadvantage for the taxpayer because [the taxpayer] must overcome all the barriers (such as knowledge and time conflicts) on [the government’s] timetable.”
As the legislature inches closer to the next session, top policy priorities will eventually be decided. Some in the Capitol have stressed the need to continue improving the property tax system — most notably regarding appraisals — but whether BPP reform will make the cut remains to be seen.
Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad watching and quoting Monty Python productions.