A constant battle is rumbling through local government offices and courtrooms that affects all property taxpayers but is invisible to most.
In one corner are businesses that hire specialized law firms that are prepared to sue to force steep cuts in their tax valuations. In the other are the McLennan County Appraisal District and its supporting local governments, who argue that the rules of the fight are rigged in favor of big businesses, which have more legal resources than small business and homeowners.
“The city and county and school district are greatly concerned about the stability of our property tax base because of these lawsuits,” Mayor Malcolm Duncan Jr. said. “The ability of commercial firms to hire attorneys and tax consultants to find a way to lower their tax base just shifts the load back onto the residential sector.”
Attorneys that represent protesting businesses disagree, saying the current system is equitable for commercial properties and that homeowners get tax breaks. Still, the stakes can be high, as some recent examples show:
This summer, Sandy Creek Energy Associates protested the value on its Riesel coal-fired power plant, which was completed in 2013 for $1.2 billion and was on MCAD’s books for $884.5 million. Sandy Creek asked the judicially appointed Appraisal Review Board to reduce the value by $631 million, citing unfavorable business conditions. The board upheld the MCAD appraisal, but Sandy Creek has until next month to appeal the value to district court. That would mean a loss of millions of dollars per year to the Riesel Independent School District, which banked on the coal plant tax base to pay more than 80 percent of a $25 million bond issue in 2010 for new schools.
H-E-B this summer protested the value of the giant store it opened a year ago on Valley Mills Drive and Interstate 35. MCAD valued it at $20.2 million, close to what H-E-B officials announced they were investing in the project. H-E-B this summer argued that it was worth only $8.5 million. The review board rejected the claim, but a lawsuit is still possible.
Caterpillar Work Tools’ bucket plant, which has received $1 million in city-county incentives in the last eight years, as well as several tax breaks, sued MCAD in 2011, 2012 and 2013 over approximately $4 million in disputed property tax base. The two sides last month settled in court, agreeing to reductions worth $974,000 during the three-year period. The Caterpillar lawsuits cost the appraisal district $23,732.
Hollywood Theaters is in litigation to reduce a $7.1 million valuation on its Woodway theater. Its most recent settlement offer to the appraisal district was $4 million.
In all, the appraisal district has spent $424,863 since 2010 defending legal challenges from taxpayers, an average of $85,000 a year.
The litigation costs helped drive MCAD’s request for a 24 percent budget increase this year, from $3.6 million to $4.4 million. The district is funded proportionally by the 44 taxing entities in McLennan County.
Chief Appraiser Drew Hahn said the district does spend a lot of money on lawsuits, and fighting back carries a further risk: If the other side wins in court, the appraisal district has to pay its attorney fees. But he said not fighting back is not an option.
“If you give them what they want, you definitely have a big gap,” he said. “If you just roll over and play dead, you’re going to take some big hits on industrial and commercial property. They know who plays hard and who doesn’t.”
The city of Waco also is trying to fight back outside the courtroom.
Since 2012, the city has written a tough new provision into economic development agreements it makes with companies, including those that get city tax abatements or cash incentives from the Waco-McLennan County Economic Development Corp.
The new “clawback provision” states that companies that dispute their property tax appraisals at a level lower than originally predicted in the agreement could lose all of their tax incentives retroactively. The provision takes into account normal depreciation of equipment.
The provision only affects agreements made since 2012, and it has not yet been tested.
Caterpillar Work Tools last year received a five-year partial tax break on a $6.2 million investment in new machinery, but it did not challenge its appraisals in 2014, the year the new improvements came online.
The Waco City Council this week voted to insert the clawback provision into a renegotiated agreement with Domtar, which recently bought the Associated Hygenic Products diaper plant in the Texas Central Industrial District.
Domtar is not suing the appraisal district over its values, but Duncan said the provision is now a routine precaution.
Duncan said he also wants Waco to join with other cities in a push to change state law that he says favors large commercial properties.
The main target is a 1997 legislative reform that lowered the bar for appraisal challenges and caused a boom in such challenges.
The Texas Constitution had long allowed taxpayers to challenge their tax appraisal either on the basis that it is out of line with market rates, or that it was not “equal and uniform” with other comparable properties.
Before 1997, few taxpayers succeeded at pursuing an “equal and uniform” case. To do so, a building owner would have to round up a list of similar buildings and use a private appraiser to establish the market value of those buildings, then argue that the building under protest was overvalued in comparison.
Now that building owner simply has to find similar buildings and show that his building is higher than average, without regard to market value.
Since the change in the law, appraisal districts across the state have increasingly been flooded by companies using sophisticated tax attorneys to protest their values, Hahn said.
The largest of the law firms in that business is Austin-based Popp and Hutcheson. Partner Jim Popp helped write the 1997 law and was influential in recent legislation that weakens appraisal districts’ right to raise a business’ appraisal following a successful appeal.
Popp and Hutcheson is representing H-E-B and Valero in challenges to MCAD appraisals.
Partner Mark Hutcheson said the 1997 reforms resulted in a system that was more fair to businesses. He said the “equal and uniform” provision is only threatening to appraisal districts that have unequal appraisals among businesses.
Before 1997, a company that bought a building could be taxed at a value that reflected the sale price, while other similar buildings around it remained underappraised and paid less in taxes, he said.
“It created massive distortions,” he said. “That’s why the equity remedy is so important.”
Hutcheson also disputes the idea that the change in the law has shifted the tax burden from commercial to residential taxpayers, saying any such appearance is because of the unprecedented housing boom of the 2000s. He said residential taxpayers are protected by homestead exemptions and caps that businesses can’t enjoy.
“There has been a movement coming out of appraisal districts against this statute,” he said. “The narrative these appraisal districts are trying to build is that somehow ‘equal and uniform’ should be abolished because it is creating a disparity between residential and commercial property. That is completely bogus.”
But Mayor Duncan is convinced that the system stacks the deck against the appraisal district when it is challenged by large businesses, and he says the problem is getting worse.
“It’s a real mess,” he said. “In years past, we’ve never wanted to rely on sales taxes because they’re so volatile. Now our concern is that property taxes could become as volatile as sales taxes.”
Duncan said he hopes to meet with county officials about lobbying for legislation in the 2015 session that would reverse the 1997 “equal and uniform” provision.
“This is not in the interest of any city or county or school district,” he said. “I don’t know why the Legislature won’t listen and make a simple change.”