Reason No. 4 to hate the McMansion ordinance

The McMansion ordinance will make the rest of us pay more in taxes.

Okay, okay, so this is not so high minded.  Still, money matters.  McMansions replace relatively low-value homes and, in the process, expand the City's tax base.  The rest of us pay less in taxes as a result.

Here's an example. Suppose Smith's got a cottage in Tarrytown with an appraised value of $350,000.  A developer comes along, buys the cottage from Smith, and tears it down.  He then builds a $1,000,000 house, which he sells to Jones.

At current tax rates, Smith's property tax bill is less than 10,000.  At the same rates, Jones' bill will be roughly $27,000, a difference of $17,000.  (The difference will be even greater if the taxable value of Smith's home is less than its appraised value.)

At first blush, it might seem like the City's $17,000 richer, but that's not quite right.  Each year, the City calculates the tax rate necessary to bring in the same amount of money as the year before (the "effective rate").  The City, theoretically, has a constant stream of revenue regardless of the tax base unless it raises taxes (which it can do without risk of a revolt as long as it doesn't exceed the "rollback rate.").  The City thus does not directly benefit from Jones' new house.

So who gets that extra $17,000?  Well, the rest of us.  Each of us pays just a tiny bit less because this one property is now worth a whole lot more.[1]

Even if the City raises taxes, the tax hike will be spread out over a bigger tax base, again saving the rest of us money.

Now I admit that Jones isn't going to save the rest of us a lot in taxes, probably just a few pennies each.  But the McMansion ordinance will discourage the construction of lots of McMansions.  That's the whole point of the ordinance.  The pennies will add up.

If you're underwhelmed by this point, think about it this way.  Below is a map of Austin prepared by the city demographer charting the average percentage increase in single family home values by zip code between 2000 and 2005. 

The color key didn't copy real well, but I can make my point with just two colors:  dark red means the single family homes in that zip code increased in value by more than 100%.  Yellow means that zip code's homes increased in value by 40-60%. What is notable is that zip 78702 -- East Austin -- saw the value of its homes shoot up by a much larger percentage than the value of homes in zip 78703 -- e.g., Tarrytown, Pemberton, Clarksville.  Assuming the number of homes in these zip codes remained relatively constant, this means that between 2000 and 2005, the average East Austin homeowner saw his property taxes increase by a larger percentage than the taxes of the average homeowner in Tarrytown, Pemberton Heights or Clarksville.  There might be some merit to the complaint of East Austinites that they're getting taxed out of their homes.

Property taxes are largely a zero sum game.  Relative value matters more than absolute value (at least, until the City starts bumping up against maximum tax rates).  If we want to ease the property tax burden on the average East Austin homeowner (or far South Austin homeowner, or far North Austin homeowner), then the average property tax burden on other homeowners must go up.  This is where McMansions help.  The people building McMansions are volunteering for a tax increase.  They're effectively pushing up the average value of homes in expensive neighborhoods by replacing modest (but expensive) homes with large (super-expensive) ones. 

Because of the McMansion ordinance, there will be hundreds of small homes in expensive neighborhoods that can no longer feasibly be upgraded to more expensive homes.  While some people think that's something to celebrate, each foregone opportunity leaves incrementally more of the tax burden on the rest of us. 

[1]It's counterintuitive, but your tax bill can go down even if your appraisal goes up.  If everyone else's property appreciates even more than yours, then your property will represent a smaller share of the total tax base and thus will have a lower tax bill -- that is, assuming the City doesn't raise the tax rate.

Correction.  I originally miscalculated Smith's tax bill.  I put $11,000 when it would be less than $10,000.  I've fixed that, and corrected the difference between Smith and Jones' taxes to $17,000.

Comments

[Ben Brumfield]

The phenomenon of taxes lowering even as appraisals increase isn't theoretical.

We own some property in a rural county of Virigina. The other corner of this county borders a lake, and there has been an explosion of luxury building in that area. For the past few years, our appraisals have gone up steadily, but the taxes we pay on our (non-luxury) property continue to fall as the county reduces the overall tax rates.

[AC]

I made a correction to the post. For some reason, the "comments" counter was reset to 0.

[Jeff]

The answer to the admitted problem of lower-income residents being forced to pay burdensome property taxes is not to build McMansions. The increased property-tax revenue from them, taking into account the fact that the lots they're built on would most likely be built upon regardless (albeit with a smaller house), is nowhere near enough to provide a balance for the tens of thousands of lower-income homeowners within the city limits. A much more effective method of revenue generation is progressive taxes that affect the same demographic - including, dare I say it, a state income taxes (though I realize the suggestion is anathema to many Texans spoiled with the idea of not having to pay them).

[M1EK]

Jeff,

My solution to increasing property taxes was going to be a modest garage apartment on top of my existing garage. The McMansion ordinance now makes that impossible, unless I want to give up the second floor on my house.

And we're not talking about 4000 square feet here; I'd be limited to effectively 1800 sqft on the house with a 600 sqft garage apt.