The Comptroller of Public Accounts, in a new study, says business property is under-valued in several parts of Harris County, including the Houston Independent School District.

A large part of the discrepancy resulted from high numbers of successful property value appeals, Harris County officials say.

The disagreement could re-ignite contentious legislative debates over property taxes, appraisal caps, and the appraisal system.

The Comptroller’s office estimates that, for tax year 2006, commercial real estate was placed on the rolls in the Houston school district at 74.23 percent of market value.

By law, the Comptroller is required to survey property to measure how close appraisal districts come to putting property on the tax rolls at market value. The study was originally designed to ensure equity in the school finance system, which relies on local property tax collections and appraisals, and to ensure that local taxpayers are paying their share of the costs of operating public schools.

The study can be politically dicey for successive comptrollers, because it is required by law and draws notice only when it says an appraisal district has under-appraised property (i.e., someone isn’t paying as much taxes as he otherwise would).

Officials with the Harris County Appraisal District question the methods the Comptroller used to arrive at that conclusion.

One of the primary differences of opinion concerns treatment of property that is the subject of a successful appeal to the Appraisal Review Board, said Guy Griscom, assistant chief appraiser for the Harris County Appraisal District.

Harris County Tax Assessor-Collector Paul Bettencourt said, “The result [of the study] is that the Comptroller is saying that commercial taxpayers are not paying enough in the state’s largest school district, and this will cause commercial taxpayers (including apartment owners) to pay a lot more than they should over the next several years.”

Comptroller Susan Combs’ staff defends the study and its methods, calling the issue one of fairness. “In our study,” said R. J. DaSilva, a spokesman for the Comptroller’s office, “we show homeowners in HISD are being appraised at over 96 percent of market value. If you have one group that’s paying their tax burden, and when you look at, for example, the issue of commercial properties, if that category is being undervalued, then you have one group of taxpayers that is not paying its fair share.”

Harris County Appraisal District officials call the problem cited in the study a legal, not an appraisal, issue. By law, a taxpayer has the right to protest an appraisal to an Appraisal Review Board.

The board is an independent administrative body appointed by the directors of the appraisal district, not the chief appraiser, and its decisions are binding unless reversed by the court system or arbitration.

Yet the Comptroller compares the value of the property on the tax rolls (which reflects the appraisal review board’s decision) with its estimate of the property’s market value.

Appraisal districts have to take the Comptroller’s property value study seriously. If a school district, for two consecutive years falls outside the five percent margin, the appraisal district that serves the school district is audited and made subject to mandatory changes in appraisal practices. After a third year, the Comptroller may recommend to the district judges in a county the appointment of a special master to run the district.

In the past, the study also had school funding implications. Districts that fell outside the margin for error for three consecutive years could have state aid reduced or Robin Hood payments increased.

A quirk known as “hold harmless” in the 2006 school finance bill has – at least temporarily – substantially reduced the study’s impact on school funding. However, if the hold harmless provisions are ever repealed or modified (the Legislature has an interim committee examining that issue), then the study could have a significant funding impact on Houston ISD.

So far, the issue has largely been confined to Harris County, for a variety of business and political reasons, and its effect has been limited largely to apartments and commercial real estate. (The Dallas ISD, for example, was rated as appraising commercial property at 94.6 percent of market value.)

In Harris County, property taxes are a high-profile issue. Owners appeal property valuations more frequently there.

Additionally, Griscom noted that most businesses in Harris County are represented by agents, who receive a contingency fee based on the tax liability they save a business.

Harris County officials are calling on the Comptroller to stop using properties whose values were reduced on appeal in the study. “What the Comptroller’s office needs to do is recognize the obvious,” Bettencourt said. “[The office’s] study is flawed because it doesn’t take into account reductions in value by appraisal review boards across the state for successful equity protests by commercial and residential taxpayers.”

Bettencourt points to HB 3492, passed in 2007, which requires the study to ensure that “different levels of appraisal resulting from protests determined under section 41.43, Tax Code, are appropriately adjusted in the study.”

He argues the Comptroller should not include any properties where there was a successful appeal in the study.

The Comptroller’s office argues that it is following the new law and does adjust for the effect of appraisal review board rulings.

The Comptroller stratifies its sample to ensure it has both low- and high-dollar properties represented. After the Houston school district protested, the comptroller pulled protested properties into a separate category to ensure that it did not over-represent appealed properties in its sample. The effect of this action, however, was to increase the disparity between the Comptroller’s estimate and the local tax roll.

Buddy Breivogel, director of the Comptroller’s Property Tax Division, said the agency should include appealed properties in its study. “We recognize that the ARB [Appraisal Review Board] does adjust values. We are charged with determining what a school district’s value is on their tax rolls … And if we didn’t recognize that, we would be comparing apples and oranges for other school districts.”

Breivogel emphasized that there are two types of property tax appeals – one class based on market value and another on equity. A market value appeal is a dispute over whether the appraisal district’s estimate truly reflects the property’s market value.

An equity appeal claims that an appraisal district failed to comply with the dictate in the Texas Constitution for “equal and uniform” taxation. In other words, if one property is appraised at 80 percent of market value and another, similar property at 100 percent, the Appraisal Review Board could knock the higher appraisal down to 80.

But if both properties are placed on the roll at 100 percent, as the Constitution mandates, the equity issue goes away. Hence, a county that substantially raised property tax appraisals might be less likely to face successful equity challenges.

The dispute between Harris County and the Comptroller’s office could re-ignite several legislative disputes from the prior session. Bettencourt noted that, during the last three years, the average appraisal increase on commercial property in Harris County was 15.75 percent. And the study found that wasn’t enough.

If the study or the Comptroller’s review of the Harris County Appraisal District results in even higher appraisals for business, it will likely provide more fodder for proponents of appraisal and revenue caps, because it may increase business community interest in both of those ideas.

Several bills debated in the 2007 session relate to the study. Critics of the study argue that it provides greater incentives for appraisal districts to increase appraisals.

Bills will likely get introduced to clarify the intent of HB 3492, Harris County officials say. Bettencourt estimated that the Houston ISD will not be able to come into compliance with the study unless its methodology is changed.

Additionally, Rep. John Otto (R-Dayton) – one of the leading legislators on property tax issues – passed HB 216 out of the House in 2007 only to see it die in the Senate Finance Committee. Otto’s bill was endorsed by the Texas Task Force on Appraisal Reform, appointed by Gov. Rick Perry and led by former state GOP chairman Tom Pauken.

The bill would have expanded the study’s margin for error from five to 10 percent. The Houston ISD would have still fallen outside the 10 percent margin for error. But the other Harris County school districts that ran afoul of the study – Cypress-Fairbanks, Alief, and Aldine – would have fallen within a 10 percent margin for error.

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