Greetings and welcome to another episode of ZacCast, the official podcast for local government nerdery of all forms. I'm Chad Janizek here with Patrick Lawler. Patrick, how have you been?

I'm good, man. I'm good.

Good. Um, before we start here, since you didn't ask me how I'm doing, I'm just gonna tell you, I have felt super old lately.

Because your bones hurt?

So... Well, for two reasons. One, over the past week, we have... So last, last year during the, like, the quarantine stuff, we did a quarantine project-

Mm-hmm

... where we built a playground for the kids in the backyard. And so this year we have expanded it a little bit, and so I spent most of last week doing that, and I'm not used to that much manual labor, so basically, uh, I was just sore for a week. So that made me feel old.

Is this like your Christmas light display? Like, is it out of control in its expansion-

It's-

... or is it controlled chaos?

It's controlled chaos.

Okay.

So after we built this little area, my wife found a, uh, a swing set for free.

Okay.

Someone in the neighborhood was giving it away, so we took that, and then, you know, a sandbox, and which don't get me started on the sandbox. But, so now we need, like, dedicated spaces to play, to put those things, right? So now we have the, the AstroTurf area, we have the mulch playground area, we have the sandbox area, so I had to build all those other places.

I'm sorry. I, I do wanna get you started on the sandbox issue, because I hate sandboxes.

Yeah, me too.

And I'm gonna tell you why I hate sandboxes, because y- sand goes everywhere.

Everywhere.

Like, you have a sandbox, it goes on every crevice outside. It ends up on your kitchen floor. It's, it's everywhere.

And my children-

So we-

My children, uh, it's very difficult to keep clothes on them, so yeah, when you talk about every crevice, you're talking about every crevice on those kids.

Yeah.

No.

Nobody likes sandboxes. Don't, don't buy kids sandboxes. Bad idea.

Uh, and then also we have been, uh, we've been watching Wheel of Fortune on Netflix.

Yes.

So that's also made me feel kind of old. Jessica's terrible at Wheel of Fortune, which is kind of funny. Um, but the one thing that I've noticed about Wheel of Fortune, and it's almost like a bingo game now, is how often Pat Sajak will fiddle with his sleeves.

Yeah.

Like, you know when you're wearing a suit and sometimes you, like, pull the sleeves of the shirt under the jacket.

Mm-hmm.

He does that, like, five or six times an episode.

So because of sports, we only watch Wheel of Fortune usually, like, two nights a week, maybe three nights a week. Probably the best player of Wheel of Fortune in our house is my eight-year-old.

Oh, really?

And that's not because we all stink. He's just really good at Wheel of Fortune.

Well, I've been doing crossword puzzles-

Oh

... lately, and it's helped.

Oh, so it's making you better?

I've always been pretty good at, I've always been pretty good at Wheel of Fortune, but it's helping.

It is kind of a, it is kind of a game of luck, though. The whole wheel thing. Like, it just, I don't know, it takes the skill out of the game.

Yeah. I just don't-

Yeah

... I don't really understand the, the buying of the vowels, especially so early. Like, you already have the R-S-T-L-N, L-N, right? You know those are-

L-N, yeah

... generally common letters. So start with those.

Mm-hmm.

And then if you get stuck, th- then buy a vowel. But don't just buy a vowel. You're just spending money.

I always get upset at the players who just go in that order, like R-S-T-L-E, or without the E, right? But they just always go in that order, and they don't use the logic of, hey, you have a couple letters and, like, there could be possibilities, and R is not one.

Mm-hmm.

But they still go with R. It... I don't know. That, that bugs me.

Yeah.

I get pretty upset with that one.

I, I mean, I think at the beginning of the puzzle, starting with any of them is probably fine.

Yeah, absolutely.

But if there's something that looks-

And, and-

... definitely like an I-N-G, right, then do your N, do your G.

Mm-hmm.

Uh, if it looks like maybe a plural, use the S. Like, you have to be strategic about how you use them after that very first letter.

A- absolutely.

Yeah.

100% agree.

Yeah. This is, so-

Yes. To actually get, yeah, to actually get into what we're talking about today, so, so we sent out, um, a, a newsletter to all of our clients, uh, with open share on it, so it's been shared a number of times. And, um, talking about the property tax system, what we really have already started to discuss in our last podcast, we rolled that into what we would consider more of, like, a, um, a detailed newsletter where we talk about the actual issues and, you know, how those issues somewhat statistically line up, uh, with the conversation that we had in our last podcast. But we wanna dig into a couple of other things, and Chad, you wanted to kinda start with kind of in addition to what we've already talked about on the dark box theory.

Yeah, the dark store theory. So, so what I wanna do-

The dark store

... is hit on the dark store theory a little bit more. We talked about it in the, uh, the roundup that, that went out yesterday, but, um, I wanna talk about it a little bit more, because it leads into a couple of issues that, that we've, we've kinda hinted at, but it wasn't the right time to talk about, and that's primarily related to why we don't like property tax. So I wanna kinda open up with, with some of this information and then segue into just sort of a complaint session about property taxes generally. So, so if you haven't read the roundup, the dark store theory is a, an appraisal theory that is not, it's not one of the approved methods that the comptrol- or that the, uh, state, the state law provides appraisal districts. Instead, it is an alternative theory that, uh, in particular Lowe's, but largely, uh, you know, single-use, big-box retailers tend to advocate for it. And the idea is that their store should be valued as if it is dark, as if it is not in use.

And it's not just Lowe's. It's Lowe's, Walmart, um, some popular grocery stores here in Texas.

Yeah.

Some, some other major users, but single-tenant owner users, basically.

Right. And, and so the, the effect of this is, I... Part of the reasoning-Behind it is you have this huge shell building, and it is built in a specific way for a Lowe's or for a Walmart or whatever, and it might be difficult to sell it in the future, um, as is, right? So if they were to leave, then the value of it would be significantly lower, and th-that may or may not be true. Uh, the problem with it is that appraisal districts are supposed to appraise properties based on how it's being used now.

Mm-hmm.

Um, and so for example, with residential properties, those properties have to be appraised based on their use as a residence homestead, even if that's not the highest and best use. So they can't look around at a redeveloping area and say, "Well, you know, you have this residential homestead, but everything else around you is redeveloping, and that makes your property worth a lot more, so you're gonna be paying a lot more. Your, your appraisal goes up." They can't do that. You can't look at a possible future use to appraise your value today. That's what these, these big-box retailers are asking for. Uh, and in other states, it's not just big-box retailers. You're seeing these places like CVS or even banks are, uh, are advocating for this. But in Texas it's, it's primarily Lowe's, but yeah, you're right. Other big-box retailers-

My, my-

... are doing this too

... my biggest concern is, is that through the settlement process with appraisal districts, these retailers have gotten the, the value of these properties down lower than what the actual cost of construction of a store would be.

Right.

Right? So, um, there's... We're not even using, like, a base construction value without, like, personal property on the interior. I mean, it's, it's legitimately you're seeing stores at $20 to $25 a foot-

For the improvements

... um, for the improvements.

Yeah.

And you just... You, you couldn't realistically construct a Walmart store or a Lowe's store for $20 a square foot.

So here-

You're just not gonna be able to do that

... here's what I wanna talk about today, though. So w- the process of writing this, this newsletter, I went through and actually pulled 41 different Lowe's from across the state of Texas. One thing I noticed is that there is some variation from county to county. So for example, in, uh, Bexar County, the average Lowe's is valued around 10.3 million. That's land and improvements-

Mm-hmm

... all in. In Tarrant County, up here in Fort Worth, the average value is around 7 million, right? So there's some variation between appraisal districts, but there's a lot of homogeneity within appraisal districts. So you look at, uh, at Tarrant County, for example, and I, I pulled four, yeah, four, uh, Lowe's stores in Tarrant County, and they're all valued right around 6.9 million, regardless of what the land is actually valued at, and the improvements basically fluctuate to get to that number. In Bexar County, uh, the improvements are valued anywhere from, what was it? $17 a foot to $53 a foot.

Mm-hmm.

Like, for the exact same store, basically, and it all seems to depend on what the land value is. If the land value is more expensive in a specific area, then the improvements are marked lower so that you basically-

So the overall value-

... get to the same overall value

... is the same. Mm-hmm. Yep. Yeah. No, so I, I think... I mean, look, there's, there's something going on, right? I mean, the data shows that there's something going on. Uh, but what's most interesting in this process is, is that the single tenants are getting this benefit, but the multi-tenant facilities or the multi-tenant power centers and users are not seeing that, right? Because they have what's called triple nets. A-anybody who's not in commercial real estate or deals with commercial st- real estate may not know what that means, but basically, the taxes of the retail center are passed through to the tenants as a cost. So there's, there's really no encouragement for the landlord to fight the tax appraisal.

Right, 'cause they-

Right, and so they don't

... they just pass it through.

Correct.

Much, much like a, a, a rental house owner would just pass through the taxes.

Correct. And you can't use the same theory as, like, a Lowe's that says, you know, if you lose a TJ Maxx in a power center that's leasing, that you couldn't backfill it with a-

A Ross or anything

... HomeGoods or Ross, you know? Anything. So it's harder to use that theory, uh, in that, even though they're probably still sitting in a 50,000 square foot or 35,000 square foot, uh, section of that power center.

Yeah.

Right?

And we've certainly seen plenty of power centers over the last, say, 12 years with large, empty, you know, empty sections in them.

Right. So, but the appraisal methods in general are just uneven. They're uneven inside commercial appraisals. They're, they're giving different types of appraisals to these single tenant, uh, you know, one owner/operator buildings, and they're giving different appraisals to these power centers with multiple tenants, uh, and, and landlords, uh, where, where the leasing is taking, uh, that into account through triple nets. So it's, it's uneven there, and then obviously, you know, what we've already talked about, it's uneven between the difference between residential and commercial appraisals. So that kinda gets us to y- the conversation that I know you wanted to get into, which was equity. You know, how, how is this equitable within the taxation system?

Yeah, so property taxes are a wealth tax, and any time you talk about taxing wealth, the question of equity come... Well, any time you talk about any kind of taxes, right, the question of equity comes up, but in particular wealth taxes, because they're not necessarily de- um, correlated with one's ability to pay those taxes, especially if-

So why do we call it a w- yeah. So why do we call it a wealth tax? Let's say that first.

Okay, so it's, it's a wealth tax. It's, it's a, it's a tax not on some kind of transaction such as, uh, you know, a job where you're earning money per the time that you work, or a sales tax, which is based on the value of what you're purchasing. Uh, it is a tax on some investment, so, or some sort of, uh, tangible asset, right?

Mm-hmm.

The, the biggest problem with wealth taxes generally is that not all assets are liquid. So say you have... You know, if all of your wealth is tied up in your, in your$5 million home, and all of a sudden we're gonna have a wealth tax, and your, that makes your net worth, you know, pretty high, but you don't have really any liquid cash, then taxing that full value can cause problems for you. And this is how people talk about getting taxed out of their homes, uh, as property values raise. Because property values go up, that's independent of your ability to, to pay that increase. You don't, you don't actually get the benefit of those values going up until you cash out and sell that home.

And, and for, a- and for those people who don't work in local government that listen to our podcast, cities actually care about this conversation. Uh, sometimes the conversation is, is different. You know, you get the over 65 population that says, "I don't wanna pay taxes anymore." And cities are like, "Well, wait a second, you- your PD and fire service are, are higher at over 65 than they are under 65, and, you know, you're still costing us money to provide you services," so forth and so on. But, you know, the, the reality is is that we totally understand kind of the, the blight of people who, um, are in a home, who then own their home, who then go on a very small fixed income and have a hard time paying taxes on the wealth that's not liquid, mainly their house, right? The most valuable asset is that. The irony of that whole conversation is is Texas has actually passed laws, and, and I find this ironic because it's like you never own your property. Um, Texas has passed laws to say, "Well, if you're over a certain age, you don't really have to pay your property taxes anymore. We'll just allow it to eat away at the equity of your home with a small interest rate, and when you die and your family goes to sell your asset, we'll just collect the taxes that are due." So it's like a reverse mortgage through the Texas taxation system. Um, I, I say that that's ironic because literally we're having to finance people's taxes for them because they're no longer working, which means their wage growth is not keeping up with the ability to pay, uh, and, and we're, you know, obviously taxing wealth that's not liquid. Um, so I'm, I'm trying to, trying to hit on that a little bit so people understand that local governments do understand those issues, but they really have no other option 'cause they have no flexibility with their consumption taxes, with sales taxes. Everybody's capped out in the state of Texas, um, and so there's no ability for them to try to reduce property taxes, uh, or give some type of property tax waiver for a subset because they don't have any o- other ability to collect that revenue.

Yeah. So, so when we talk about equity, I'm gonna probably say a few things here that I may or may not agree with so much, but that are basically kind of for the purposes of level setting. One issue in e- with equity regarding property taxes is that, we talked about this in two episodes ago, but, uh, commercial properties are income-producing properties. Residential properties are not, right? So when, when you have these dark story theories that are causing big box retailers who make significant amounts of money off of those properties... Now, in some cases, in like, you know, um, you mentioned grocery stores, the margins are very low. That's fine. Uh, but not every big box retailer has super thin margins. They are making money off of these properties. They're income producing. So when those values are not changing, you know, a, a Lowe's store's value is not changing for six years, they're paying basically-

Tarrant, Tarrant, Tarrant County-

Right. They're paying-

... has not changed value since 2016.

And it's valued at far less than even what it would take to construct it. There's an equity issue that gets raised between commercial and residential property taxes. Now, um, I say that I may or may not agree with this mainly because I'm not a huge fan of, of commer- or business taxes generally. Um, and we can talk about the reasons why in just a moment. I think that's another issue with property taxes is the actual incidence of who pays the tax versus who physically pays, writes the check versus who's actually paying the tax. Um, but with this dark story theory, you also have equity issues between commercial, uh, users, right? So if you are renting space for a Ross and your landlord is not protesting these, these valuations like the Walmart across the street is, you're paying significantly more on property taxes, and you have no recourse, uh, because, you know, you don't have standing to, to protest or arbitrate those value growths. So there's also that, that sort of intra commercial equity issue as well with property taxes.

Yeah. I, I-

At least with the way that we are currently appraising commercial properties.

You know, I've always talked about my dislike for... Y- y- you're correct about all of that. I, I mean, uh, you know, you say you're not really taking a stance on it, but the reality is is that those are true equity issues. Like there's, there's not a ton of argument that can be had. I, I, I think the other side of that which I look at, which really bugs me, is that, you know, we're in this world where we, we get to actually see some of those sales volume data, and it doesn't matter whether a Lowe's is worth $7 million and all, you know, 14 Lowe's that we identified in one county are all valued around that same amount of money. The fact is is they're all doing different sales volumes, and so there's just, there's really just no rhyme or reason other than the fact of Lowe's has hired high-powered attorneys to go in and negotiate with all these districts and basically gotten like a flat rate tax on the property tax system throughout that entirety, uh, or that entire county. And not only that, but we've seen that happen in multiple counties.

Right. And that's not something that, that's not something that tenant commercial users have the option to do, and it's certainly not something that residential owners have the means to do.

And I'm just gonna go out on a limb. It's not something that a single tenant user should be able to do. We shouldn't be allowing Lowe's and, and, and Walmart and Home Depot and these major grocers and all these different players to do this because ultimately we're just moving that tax incidence over to the residential side. Um, you know, it's, it's a shift of the tax burdenUh, that- that's occurring. I, I say all of that with this one big, bold statement. And, and look, we make money on property tax analysis, but I'm gonna be honest, I personally do not like property tax. And you got back to the ... And I, I appreciate you explaining the wealth tax portion of it. I don't like it because it's a tax on wealth. And the reason I don't like it is just the logical conversation of it discourages overall investment in people's properties. Because if they invest in those properties, the system is rigged against them, right? If you build a pool, that improvement value gets added without 10% cap, and anything else that you add that year gets added without 10% cap, and all that value is captured. So it, it almost encourages the system where people do not invest in their properties.

Right. You have a, say you have a $300,000 house. You build a $75,000 pool and patio.

Mm-hmm.

Now your property values are 375. So you're paying your, you know, $2.25 tax on that extra $75,000. So it's not just that you're, you're having to refi-

Plus the cap. Well, hold on. Plus the cap capture.

Right. Yeah.

You gotta remember that too, 'cause w- in the state of Texas right now, for, for those of you that listen to us outside the state of Texas, my house was appraised at, you know, some crazy ballpark, like $165 a square foot when I refinanced my mortgage four months ago. I had a real estate agent tell me yesterday that I could sell my house for $190 a square foot. That's how crazy the real estate market is right now in Texas because we just have so many people relocating to our region that it's, it's wild. So there's a lot of recapture that's left. Like, I hit my 10% cap on my property every single year and have for, like, the last four years. When I built my pool, there was a lot of recapture left there that all of a sudden got put back in because I put a new improvement on my house and it opened that up, right? So I, I say all of that just because it discourages investment. I want to put money in my property, right? There's value to me putting money in my property. And it's a good investment in Texas to, to do so, uh, right? Dave, Dave Ramsey talks about all the bad debt that's out there. Uh, I'm just gonna say it. I'm gonna say, you know, the reality, I'm a big Dave Ramsey guy. Is this the first time I've ever talked about Dave Ramsey on the podcast?

Yeah, 'cause I won't let you.

I know. So I don't carry credit card debt, uh, pretty much don't carry any car debt. Lot, lots of other stuff. But, um, you know, I, I carry my mortgage, and, and it is what it is. But, uh, homes are good investments. And, uh, property is a good investment 'cause it appreciates. So, uh, without giving investment advice, the problem in Texas is, is that we are detrimental to people-

Yeah

... putting that money in there.

Disclaimer, we are not registered tax advisors.

We are not registered. I do not have a series, I think it's a seven license on that one. But, um, uh, but what I, what I'm trying to say is, is that the system is set up that way and it's very difficult. To take that one step further, we're not gonna get out of it. Like, property tax is not gonna go away in Texas. One, you can't have an income tax 'cause we have a constitutional amendment against it, and I'm okay with that one, too. And just to be flat out honest, I'm a big consumption tax guy. I mean, just at the end of the day, I like consumption tax. I like sales tax. I like VATs. If, if you say that it's regressive, I don't argue with you. I just say that there are things we can do to make it less regressive of a tax. Um, but I just think it's a better way, uh, to, to tax. And, and yes, it's not as safe for a governmental entity. But in Texas, the real reason we're not gonna get out of our property tax is because that's how schools are funded. We may not have an income tax, but we have a de facto statewide income tax in your property tax that goes to your school district. 'Cause all that money rolls to the state before it rolls back down to your local school district. So, uh, my two cents off my soapbox.

Okay, so that's equity. Let's talk about tax incidence.

Mm-hmm.

One of the reasons that I don't like property taxes is because I like the people who actually pay the taxes to be the ones that write the checks for taxes. And the, the biggest problem with business taxes and corporate taxes, whether it's corporate income or property taxes assessed to a corporation, is that that ... It's not like there's just some person representing this company who's actually paying the taxes. That, those taxes get diffused largely among three groups: shareholders, if it's a public company, or owners if it's not; workers, through the form of lower wages; and customers through the form of higher prices. So what's, what's really happening with corporate taxes i- is not that, you know, we're sticking it to these big companies. It's that these costs are just getting shared with, with everyone else. And it, it kind of hides the actual burden of taxation, uh, because you're not actually seeing any kind of bill come to you. You're just paying it in the form of higher taxes or, if you're an employee, in the form of lower wages or, if you're a shareholder, in the form of lower earnings, right? So that's, that's my, my fundamental problem with corporate taxes. Um, one issue that we would potentially have if we were able to sort of right this property tax problem is that, let's just say, let's just say the dark store theory gets, gets fixed. Yes, it would technically be shifting the burden back to commercial property taxation, but that's, again, that's just gonna get shifted back down through those various rungs to the workers, to the customers, and to the sh- to the owners.

But m- my, my comment on that would be is that there are options at that point, right? There are options for the consumer to not consume, okay? There are options for the worker to not take that pay decrease and go work somewhere else, and there are options for the shareholders to not pass that savings to themselves or to s- take that wage as a loss.

So I don't think that you're gonna get, I don't think you'd get a situation where a Lowe's would say, "Okay, we have to pay everyone, you know, 30 cents less an hour." It's most likely going ... 'Cause, 'cause you have sticky wages, right? So what's most likely gonna happen is in the short term that, the, what will take a hit is profitsAnd then over the long term, what will happen is higher prices and lower wages, you know, as we move forward, right? So it's not gonna be like, "Oh, well, property taxes went up. We have to cut your pay." It's not-- That's not gonna happen. The, the, the profits will take the initial hit, but in the long run, those other things will pick up the slack.

And, and I'm not saying I don't disagree that the individual is the person who ends up getting the tax incidence some form or fashion at some point. Um, I'm just saying I like it better when there's an option, when the consumer has an option, and with property taxes, you don't have that option.

Yeah. So what, what is a good thing about property tax? It's super stable.

Very stable.

Uh-

Grad school one on one, everybody loves their property tax.

Yeah. So, like, for all of its flaws, it does bring a level of stability, and that's important when you are using it to pay for debt.

Sorry.

Ugh, gotta edit that out.

Had a huge sneeze. You gotta edit that out, yeah.

So when-

I tried. I was giving you, I was giving you the, "I'm about to sneeze. I'm about to sneeze."

Oh, just leave it in. Doesn't matter.

Yeah.

So when you're using... When you... You have to have a revenue source to pay debt, right? Like-

Mm-hmm

... operations can be adjusted if you have to do furloughs temporarily, if you have to actually reduce workforce. Like, those are just ongoing things that you decide every single year how you're gonna fund and at what level. Debt, you don't really have that option unless you wanna default, which we don't wanna do. So it is good to have a stable revenue source and, and, you know, if we were just to, like, be king for a day and get rid of property taxes, it might still be a good idea to keep them for interest in syncing, um, and, and let local governments have that financing mechanism. But, you know-

I would agree, I would agree with that 'cause when we were in Hudson Oaks, we used to have to carry huge cash balances to make sure that we could pay debt in a future year if something happened, right? 'Cause operations and other things could be stabilized, but we needed to make sure that we had a debt service and a syncing fund that was substantial enough to be able to carry that debt for over a year. Um, and yeah, so I 100% agree. I, I, I think the other thing that people find attractive with property taxes is, um, that it is easier to, uh, to collect upon, it is easier to, to get your revenue out of, and you probably... a- and I say this, y-you have less, uh, you have less people that are able to avoid. You don't have tax avoidance that occurs in property tax because everybody has to live somewhere.

Well, your tax avoidance-

What are you-

... comes in the form of appraisal adjustments, but yeah.

That's, that's correct, right?

At some point you're gonna get your money, right? 'Cause if the house gets foreclosed, when it sells, you're gonna get that... you're gonna have that lien on it.

Yeah, yeah, yeah. But, but hello, Texas. We've done that to ourselves, right? I mean, at the end of the day, Texas has allowed the tax avoidance argument in the appraisals because we wrote it in the statute. We provided these abilities for people to get these special types of appraisals in commercial, where residential doesn't have that option. Um, and, and so yeah, we've, we've kind of shot ourselves in the foot on that one. Uh, but I mean, there are some pros to property tax. I don't wanna just be a anti-property taxer. I'm not, I'm not trying to roll that out. You probably are. But the reality is, is that it, it just... people like it because it's stable and it's dependable.

Have you come yet to a point where you have any kind of proposals to actually fix the problem?

We've talked about this a little bit offline, right?

Mm-hmm.

And done a little bit of analysis on it. We really haven't, uh, had a chance to review the analysis that we've done. My initial gut suggestion is, is that you, you have a previous year tax base by use type, um, but that still doesn't fix the equity issue between single tenant and multi-tenant users. It does kinda help the equity between commercial and residential, right? Um, and, and what I mean by that is l-let's say you have a 50 cent tax rate, commercial values go down or stay stagnant or grow at a slower rate, uh, than residential, then your residential tax rate would compress more than your commercial tax rate would, um, in order to make sure that each class a-at its previous base is, is basically paying the same amount at the no new tax rate. That's my initial gut feeling for what we should be doing, um, but you actually made a good point in that, that that doesn't fix the issue between single tenant and multi-tenant buildings.

Yeah. I, I think the biggest thing is that properties need to be appraised as close as they can be to market, and there is a distortionary effect of having the resources to hire, say, a state senator who can do your consulting on your, you know, uh, your protests, your appraisal protests.

Who also writes the legislation. But we, we wanna save that for a future podcast-

Yes, we'll save that for a future podcast

... 'cause I think it's like it's, it's like its, its own special conversation to have.

S- so-

Uh, expose to, to say anything else but-

To kind of explain a little bit more of what you just said, essentially what a po- a potential solution would be, or at least a, a band-aid, would be instead of having a single property tax rate per entity, you would actually have a separate rate for every property type.

Yes.

And you would do the no new tax rate calculation for every property type, right? So, uh, and then essentially you would say, "Okay, we need to... We want to generate three and a half percent more in revenue, but every property type has to grow by the same amount," right? So the residential tax rate might decrease, and it's gonna grow-

Mm-hmm

... by 3% or 3.5% total. The commercial tax rate may have to increase a little bit so that it grows by 3.5% total, and then the same thing for personal property and for, for mineral properties, right? So that way, instead of saying, "Overall, we're throw- growing at 3.5%, but residential is growing by seven and commercial is dropping by one," et cetera, et cetera, every category will go, grow by the same amount. And so those tax rates will, would shift Sim City style, uh, and allow that. Now, that adds a lot of complexityBut it does fix the burden shifting issue.

It, it does, and it's, it, you know, the, the easiest fix is basically to say that all commercial appraisals should be done at whatever the cost to build that building is, right? I mean, that's ... Uh, just put it on the same level playing field as residential. If it costs you $25 million to build a Lowe's store, you can't appraise it at $7 million. That's the easiest way to fix this problem.

Yeah, but are all residential properties appraised at their replacement value?

They're not replaced at their replacement value, they're, uh, sorry, uh, they're appraised at their market value.

Mm-hmm.

So if your neighbor's house sells for $185 a square foot, and that house is somewhat similar to yours all throughout in by accoutrement, then your house will appraise at that level as well.

Right, but if you were-

They'll adjust the appraisal

... if you had just had a piece of land, you could potentially build it for less than that.

You could-

Yeah

... potentially build it for less than that, yeah. Um-

But the, the likelihood that your property will be appraised for less than you could build it is very low as a residential homeowner.

But the most ... Correct, but the most famous story we have here in Parker County of, of this occurring is this. We built a brand-new $100 million hospital facility, right? Uh, and it was appraised like three years later at $60 million. How do you build a $100 million hospital and all of a sudden it loses $40 million in value?

Yeah, like what, what do your books look like, right? You have this asset that all of a sudden has depreciated by 40% apparently.

Yeah. And, and, and the reality is is they went in there and they argued with the appraisal district that, you know, it could only be used as a hospital, and so therefore, if it's not a hospital, it could be, you know, it's, it would cost all this money to try to transition it into something else, so it doesn't have that value. My point would be except you use it as a hospital. And to the hospital, it was worth $100 million to build it, right? So why, why is this a question? I, I don't understand why we allow that loophole to remain within our state statute, uh, and within the, the settled, which is the other part of this, the settled, uh, case law and settlement process that happens in appraisal districts. A lot of people, that's the dark underbelly that people don't understand is that these appraisal districts because they don't wanna get sued and they don't wanna pay the legal fees of who they're getting sued by are very fearful in, in going to try to fight these individuals or these businesses. And so therefore, they just settle, and they make that deal across the board, which is why in Tarrant County or in Bexar County, you have the same value for 14 different locations of a single tenant store. I think there is a way to fix this. I just think it's a-

Is there a way to fix it, though, that doesn't add significant administrative burden?

Yeah, cost of construction. I mean, I, I think that's the easiest way to fix this.

You think you could just do cost of construction and leave the single tax rate and that would-

Correct

... that would largely-

What, what does it cost me in today's market to build this house? Cost of construction. And then, you know, basically what did it, it, and then depreciate it for the age of the structure based on what is there. And, and that's not gonna be a huge depreciation. I'm not talking about like a house is gonna lose one 27th of its value every year, which is the IRS depreciation schedule for residential property, nerds. But the reality is is that a used house is going to have less value than a new house, so there's gonna be some market difference there.

I don't know if that's necessarily true.

Well, we have found in property tax that it's not always true. Some of the cool data that we found, especially in really old cities, is that a lot of times houses that were built in like the 1940s and 1950s have more value per square-

Mm-hmm

... foot than new homes, right? So I'm not saying it's always true. I'm just saying that you could come up with some type of appraisal method that was there, and that would a- that would take away the loophole from the commercial structures.

Yeah. I don't know that you'd want to depreciate, though, because, I mean, even if you did 150th, there are cities that have homes that are well more than 50 years old. They're gonna have no value.

But if you could ... Uh, I mean, I'm not saying, no, I'm not saying you're depreciating them all the way down. I'm just saying you're depreciating for the fact that it may be older and therefore have less value. And that's not always true. I agree with you. But you're not taking, like I said, you're not taking one 27th of the value away every single year. I'm not, I'm not saying that. I'm just saying that if you went out and tried to construct that house, that exact house on that exact lot today, it may be more expensive to do that because of the cost of lubber- lumber and the cost of brick and all that type of stuff. So that's the point I'm trying to make. But I do think, I do think there is a way, I do think there is a way for us to fix the property tax system in Texas. I, I don't think you can legitimately walk in and say, "Let's just burn property tax down and get rid of it." Uh, there's that movement out there in the state of Texas, and it's gotten popular, and there's lots of Facebook pages and things like that that are there. But honest to goodness truth, the state is just too dependent on school taxes. You know, the Charlie Geren bill that, that came up in the legislative session last go around would have removed a significant portion of property taxes from a lot of cities 'cause it would've given them a local option tax to reduce it. Uh, and for a lot of cities, that would've brought their tax rate down to pretty much their I&S rate, which is what you spoke of earlier. But the, the reality is is that, uh, the reason we have property tax in the state of Texas is not because of localities. It's because of school districts. Don't forget that. The only way the state is able to fund education in Texas is through property taxes. That's it. Are we ready to go on to another topic? 'Cause I have something to talk to you about.

Yeah, go for it.

Here we go. So I wanna talk to you about organizational culture.

Ooh, okay.

Okay. So organizational culture is always something that's been very important to both of us, right? Valid?

Oh, yeah, definitely. Uh, I didn't-

Yeah. Okay

... I didn't know that was a question, sorry.

It, I mean, you, you believe that organizational culture is very important?

Yes, I do. Um, I, I feel like organizational culture is kind of like muscle memory.

Okay.

Like a couple of days ago, I was changing my, my youngest. He's, he's turns one next week. Super exciting. We had pictures today. I have, uh, smash cake all over my clothes. Um-So we're changing, I'm changing his diaper. I pull a diaper out of the pile, I do the thing where I like flick it to open it and I get ready to put it under him, but the diapers had been put in upside down, right? So like I have this muscle memory boom, open it, flip it in, like this is just how I put the diaper on and everything was thrown off because I had to a- flip it back over, right? I, I think organizational culture's kind of like that. You-

Uh-huh

... it, it, it's, it's very important because it, it provides you with that sort of muscle memory where, um, things can kind of happen on their own. Like there's some things you just don't have to worry about because the culture has sort of imbued itself into the de- decision making process. Uh, that may be a stupid analogy. I don't know. But-

I, I thought it was a pretty good analogy. I just find it humorous 'cause I think you've had a kid in diapers for like the last five years.

Yeah. It's gonna be... Yeah.

Yeah.

So, so my youngest turns one next week, and then a month later we have number four coming. So I got, I got many-

That's amazing

... many more years of diaper changing.

So I bring up organizational culture 'cause there's, there's a lot going on in the college basketball world. Okay? Texas is in need of a new coach, and the top prospect for Texas is a guy named Chris Beard, who has been very successful at Texas Tech. Highly successful at Texas Tech, right? This year, I think they went to the Elite Eight and lost, right? Maybe they lost in the Sweet 16. I think they lost in Sweet 16. The previous year, maybe they went to the Final Four or somewhere on there.

It was... Yeah, it was two years ago 'cause there wasn't a tournament last year.

Two years ago. Yeah, there was no tournament in COVID. But I said to you before we got this podcast started, I said, "Hey, what are y'all gonna do with Texas basketball now?" 'Cause I know you at least keep up with Texas basketball. The question I asked was, "Who are y'all gonna go get for Shaka Smart?" And your response was, 'cause you're on Orangeblood's about four hours a day, your response was, "I think we've got a shot to go get Chris Beard. It really depends on what Texas Tech does to step up." And my response to you was, "Why would Chris Beard want to go to Texas with the organizational culture that Texas has for coaches?" You never answered the question, so I'm asking it on the podcast.

Well, you said you wanted to talk about it on a podcast, so I didn't say that-

Yeah

... necessarily we had a chance. I said that he appears to be the top target, and it appears that Tech is going to try to keep him there at all costs. You know, why did Shaka Smart leave VCU to come to Texas? Uh-

That was a different time for Texas, to be fair. The luster was different than it is now. I feel like back then, before they've gone through the ADs, before they've gone through some of these football coaches, it was a premier job. In any sport, Texas was a premier job. It does not seem that way any longer. Will you admit that that's, that to be the case?

I think that it really depends on the, the person.

You're dancing.

Right? Some people- If, if you wanna talk about premier jobs for, uh, Austin versus College Station, I'm happy to have that conversation.

Uh-huh.

But why would someone leave Texas Tech, where they've already built a program into, uh, into one that played for a national title two years ago-

Mm-hmm

... to come to Texas? Uh, it, I mean, it really depends. N- not everyone wants to go to the limelight. But like John F. Kennedy said, "Why does Rice play Texas?" Because we try to do, in America, we do the hard things, right? We-

Wow.

Some people want to go to the flagship university with the prestige and the resources and show that they can do it on the big stage. Others are more content to be, uh, big fishes in small ponds. I, I mean, that, I think that's-

I, I don't, I don't think you could say prestige anymore though. That's the thing. And I'm, I'm not saying this because I'm an Aggie, okay? I, I'm saying this because legitimately Texas has, has, has-

How many top four finishes has-

They've, they've got rusty

... how many top four finishes in any major sport has A&M had since the beginning of World War II?

And it... What, what do you mean by major sport?

Like revenue producing sports.

Is that just-

The top three.

So it doesn't include softball, soccer-

Do those generate revenue?

They do. I think softball is profitable at A&M. It's a check. It's really good. Soccer-

Our softball team is good, too. They don't make money.

Yeah. Women's basketball?

Yeah. Our, our, you know what? We just-

I'm sure where Texas has been at women's basketball.

What, you're not sure where they've been?

Yeah.

Well, they're in the Elite Eight right now.

They're in now. So is A&M, right?

I have no idea. I don't, I don't follow A&M.

I have, I think they are.

I mean, we just won our 15th NCAA tournament in swimming.

Speaking of, if I'm Jessica, your wife, who went to Baylor-

Mm-hmm

... right? Super upset about the UConn no foul call.

And I-

That was, that was ridiculous

... all I can say is I, I just don't watch basketball anymore. I, I, I the last time that I religiously watched basketball of any, of a- any level was the 1995, '96 season when the Rockets beat the Orlando Magic for their second straight title.

So I, so I get that. I, I do want our listeners to understand, though, that you are a fanatical Texas fan, especially when it comes to football.

So, uh, yes, I am. I, I'm wondering how this divergence into, uh, Texas's basketball coaching search came about. I thought you actually had a legitimate topic on organizational culture.

No, I do. I do have a legit- I do have a legitimate to- topic because, um, I'm trying to say this without, uh, without, like outing the city. So I had a conversation with a young professional the other day where we were talking about organizational culture. Um, and it, it was a young professional, doesn't work in the state of Texas. They're looking at locating in the state of Texas, and they asked me about a specific city in the state of Texas, and they, they looked at that city and they said, "Well, that must be just like a really great place to work." You know? Like, like that's the city that you could buy their T-shirt at Walmart, right? Like, you could buy a Texas T-shirt at Walmart. But-

Okay, two things

... the re-

Two things.

Okay, hold on. Timeout.

Let's do real quick.

Hold on. I know.

Real quick.

I gotta finish my thought.

Real quick.

Squirrel.

Just, just pocket it. Two things. One, you can buy A&M T-shirts at Walmart, and two-

Only in College Station

... and two, don't you want your brand to be big enough where people want to buy your T-shirts outside of the city that the school is in?

I just want my fans to actually care about my team and not be a T-shirt fan.

Okay. Continue.

That's, that's what I want, right? Okay. So to be clear, they, they said, you know, they were really into the city, and they said, you know, "Why, um, why aren't there more people in Texas that really wanna work for this city?" And I said, "Because the organizational culture of that city." Because within city management in Texas, it's a very close-knit community, and when there's a bad organizational situation or, or culture that occurs, they tend to go a number of years without getting high-quality candidates that apply for those jobs.

Ooh, what city is it?

My point... I-

Just kidding.

I'm... Right, they're not a client, right? So I'm not super worried about offending anybody, but it's a city that's known-

They could be one day.

They could be one day. It's a city that's known nationally-

If they get their together.

It's recognized, but the reality is, is that people in the management culture of Texas who went to UTD or UTA or Sam Houston or, uh, you know, anywhere else that, that may or, uh, UNT or anywhere else for grad school, they don't go work there, and the reason they don't go work there is because it's just not a good fit to grow your career, right?

Okay.

But for out-of-state people, they tend to work there. So my comment to you was is Texas in this position where nationally Texas is kinda looked at as it's this great university, but within the coaching world it's looked at as, like, I'm gonna get fired in two years because the alum can't get their crap together, they can't even get the board of trustees correct, and we've had, like, three ADs in the last eight years.

Yeah, so actually, so when Steve Sarkisian was, was hired as the football coach-

Mm-hmm

... a few months ago, he actually said the exact opposite, and I think that actually you have it backwards. I think that the public perception of Texas is far different than the perception is among, uh, people in the field. Now, do I think there are specific and unique challenges at Texas? Absolutely. The, the-

What are those?

I don't know. If, if we knew we could-

Okay

... fix them and we wouldn't be in this sort of limbo.

See, I think, I think Texas... I think the organization at Texas does know what those challenges are, yet chooses not to fix them.

You think that these challenges primarily stem from inflated expectations and overeager beavers in the alumni community?

I think inflated expectations are the first one. Uh, I think Mack Brown was a fantastic football coach. I don't think Texas realized how good a football coach he really was, uh, and their expectations to go to a national championship every year got ahold of him. Uh, I, yeah, I do think that. I think the second part of that is Austin in general is not conducive to great student athletes. I think it's a very difficult place to be a focused student athlete. I just do. It's a very difficult place for me to be a focused human let alone a student athlete, right? You send me to Austin on a conference and, I mean, you and I go to Austin and we have great drinks, great food, and a great time, right?

Yeah, it's a terrible place.

It's, it's a... Yes.

So-

It's a great s- it's a great city, guys.

Okay, I mean-

Austin's fantastic

... then talk to me about how that is not also the case at, say, USC. Like, I can under-

Well, it is the case at USC. It's the same cultural issue at USC that they have at Austin.

Yeah, but USC-

Look at what's happened at USC. Take away the k- the fact that players get paid, you know, and now that we have, like, this tight system where you can... And I'm not saying Texas paid players. I wanna be very clear, right? But you take away all those special Reggie Bush situations that happened at USC, and USC is not very good.

So what you're saying is that the only way that you can have a quality athletic program is if you are located in the middle of nowhere like College Station, or-

Not saying that at all

... or Tuscaloosa.

No. No. I'm saying that you have to be able to build an athletic culture. Clemson has built an organizational and athletic culture. Alabama has built an organizational athletic culture. A- and as an Aggie fan, that's what I wanna see. I wanna see that culture get built.

So, uh-

Right? And I believe Texas actually has the upper hand to try to go build that culture. It's just the, the internal workings of the university and the town and everything else just... It, it's just, it's such an uphill battle.

I think largely... Look, I think if you look over the, the historical run of the program, there have been periods of great success and periods of mediocrity, and the mediocrity has probably been more frequent than the periods of great success, okay?

Mm-hmm.

You have Darrell Royal, who had just a run, uh, of great success. We had a couple of opportunities for national titles in between Darrell Royal and Mack Brown, but for the most part, I mean, that was... Those were the '80s. Those were when, uh, those Aggie teams were paying players and winning Southwest Conference titles, right? Uh-

Paying players. Come on. We're not SMU.

Uh-

Don't put that on us.

I think Mack Brown did build a, a, a winning culture, and then his time needed to end. Um, and unfortunately, when that time came, we didn't have the right leadership in place. We had a president who was not super concerned about athletics, and we had a, an athletic director who was just terrible, Steve Patterson. He was, he was awful for the university.

And, uh, do you take that even further to then blame that on the fact that there was an Aggie governor who tried to kill out everything that there was at Texas Uni- I mean, or do you go that far? Like, it was all Rick Perry's fault?

I don't think it was all Rick Perry's fault, but I think it's, it's naive to say that he wasn't trying to hamper the UT system. But regardless, that, that didn't-

The man was r- re- I mean, he has really good hair.

Yeah, he has-

But other-

Yeah. Yeah.

Yeah.

He has so much going for him. Um, so... Uh, so yeah, I, I, I think that-At the time when we happened to come about a transition, we didn't have the right leadership in place. We brought in the wrong football coach in Charlie Strong. He was a good guy, but he wasn't up for the job. We brought in Tom Herman, who wasn't mature enough as a coach to handle a program that big. Uh, and, uh, hopefully that... hopefully Steve Sarkisian will be able to do that. But there are a lot more pressures and, and extraneous factors that go into coaching at Texas that don't necessarily go into coaching at somewhere like Tech or A&M, uh, or places like that. So I don't know. I guess we'll see. If Chris Beard comes to Texas and he doesn't win, so be it. That's why, that's why I was super excited about the possibility of Urban Meyer, because if Urban Meyer had come to Texas and he did not win, we would absolutely definitively know that there were major, major issues with the UT athletics program that, uh, that were gonna have to be addressed before we could actually get back to any kind of prominence. 'Cause if Urban Meyer can't win at your school, then you got something wrong.

Uh, y- you know, I would say that was valid, but could you say the same thing for the coach at A&M right now?

Uh.

You, you don't love Jimbo Fisher.

Uh, we'll see. Uh, I-

I believe that A&M did the right thing. You and I argued about this. We didn't have a podcast back then, right? But you and I argued about this years ago, about the long-term 10-year contract that we gave Jimbo Fisher. And my statement to you was, our program needed to provide that length of time to actually grow an organizational culture, right? They needed to be able to grow a winning culture at A&M. And I felt like last year was the possible breakthrough, and I think this year we'll see.

Yeah. We will see. Uh, I don't have high hopes for, for Mr. Jimbo down there in College Station.

I have high hopes.

Please don't sing. I hate having to cut that stuff. Well, man, I-

That's it. That's all I got for you

... yeah, I appreciate this like 20-minute diversions into almost completely irrelevant topics. But-

Uh-huh

... you know, I'm always-

Of course

... I'm always happy to, to listen to your, uh, baseless rantings against the University of Texas.

I think what I'm most excited about is, uh, your brother in Prague who's gonna hear this part and talk about it. That's the one that I'm excited about. Has he moved yet?

Uh, no. They're working through all the-

Okay

... all the-

Details

... immigration stuff.

Yep. Okay.

Which is remarkably easier now than it was last year.

Okay. Well, the reality of this situation though, Texas is looking for a basketball coach. Let's see who it is. I guarantee I'm gonna get a, I'm gonna get a text message from Chad a week from now, "I can't believe we hired this guy." You were somewhat lukewarm excited about Sark.

I wasn't super excited about him.

Yeah. So-

Uh, I, I reserve the right to change my mind, but I didn't-

I did not save those text messages. I, I should have screenshotted them-

Yeah

... just so I'd have them for posterity.

I think that, I think that at the end of the day, I would've... I will come out looking good with my, uh, reserved judgment about it.

Yeah, I don't think your judgment was initially reserved. I think your judgment was initially, um-

My, my judgment initially was-

Upset. You were upset. Well, Urban Meyer took the job at, uh-

That was after

... the pro team, right?

That was after.

Was that after? Okay.

My initial reaction was, I don't know why we spent $35 million to buy Tom Herman out to get Steve Sarkisian.

Because Tom Herman couldn't swing a sledgehammer for the life of him.

I'm gonna have to cut-

We should've known day one

... so much of this because it's...

We should've. I mean-

Should've just stopped.

It... Herman had that job for like two weeks, and I sent you that clip of him swinging a sledgehammer and it bouncing back at him. He's a football coach. That's all I got. You can cut all that out. All right. Well, hey, everybody, we appreciate you for joining us on ZacCast. I know we got off on a tangent there, uh, talking about, uh, Texas basketball and Chad's total uncomfortable, uh, stance on what's gonna happen there and the organizational culture. But reality is, hey, the property tax information's really important. If you haven't checked out our newsletter yet, uh, please do so. Uh, if you'd like to get a copy of that, you can email us at chadorpatrick-

What is-

... @zachtax.com.

What is this, like 1999? If you-

Uh, just gonna put it in the show notes.

If you want the newsletter, you can check the show notes, or you can go to roundup.zachtax.com. It is emailed. So it... like we don't have to print out a copy and mail it to your house, 'cause this is 2021. You can-

If you get this... Hold on. If you read the newsletter, it'd just be like it's in the, in the aughties? What did you call it?

Aughts.

The aughts.

The aughts.

It'd be in the aughts.

The first decade of a century, the aughts.

This whole section's not getting cut out by the, by the, by the way. So, but no, we, we thank you guys for, uh, joining us on ZacCast, and we hope you have a good day. See ya, Chad.

Bye, Pat.