Welcome to the summer edition of ZacCast.

Greetings, and welcome back to ZacCast. Uh, thank you, Mason, for the introduction to maybe the one and only summer episode. Um, I'm Chad, that's Patrick, and yeah, we're back. It's been a crazy couple of months, so we apologize for the, uh, the lack of content. But, um, we're in a legislative special session right now here in Texas, and so we've got quite a bit to talk about from a property tax standpoint. But before we get to that, Patrick, how you been?

I'm good, man. I'm good. It's been a lot of summering. A lot of summering. I'm ready for the kids to go back to school. They still got a month at the house. So yeah, but no, it's good. Things are, uh, we're finally rolling into July, and things are gonna slow down a little bit for us. Uh, I feel like I've been all over the place for the past month, the month of June. I know you've traveled a little bit as well. Um, so you still have a little bit of traveling in your future, but, uh-

Dude

... I'm slowing down. Yeah.

I'm gonna be going up to, uh, the Alaska area, where it is much cooler than it is here in, uh, sweltering North Texas.

Yeah. I am blessed to go out and visit, uh, uh, visit Michael in California here, uh, in a couple of days, and so that will cool me down just a little bit. Their average temperature, we were joking around the other day, um, I think, you know, it was like, "Hey, we've got a meeting. I, I need you guys to have a meeting," and it was, it was as if we both were ready to jump on that meeting to get out of Texas.

Immediately.

It was currently 106 degrees in Texas and like a, a, a high of like 67 there in California. So, uh, it's, it's been a hot one so far, but it kinda cooled down this week, and I think it's supposed to get hot again next week. But yeah, um, some good things. Speaking of heat, the legislative session, part deux by the way.

Wow.

Yeah. Way, way transition.

That was a segue, my friend. That was a segue.

Yeah, that was a segue. So Texas is in its second special session. Uh, the first special session, um, the House came back, and it, and the, and the special session is all about property tax, right? I mean, pretty much the only thing on the call of any substance is, is property tax, um, right now. There is a belief that we're gonna have another special session called ironically for, um, for school vouchers. Um, they, uh, for education savings accounts is the, the new term being used in Texas there. We think they're gonna call a special session in the fall. Um, I was actually told by a lobbyist, uh, really funny, uh, comment was they don't wanna bring back that issue in the summer because all the teachers are out of school, and they don't want people- ... to come to Austin and, and protest. So great governance there from, uh, from our legislature, and, uh, they're gonna bring that back in the fall. Uh, but right now we have property tax reform because we have this huge surplus, uh, in the state of Texas. We had a surplus that was a- almost 15%, I think somewhere around 15% of our total, uh, biennial budget, right?

Yeah, probably a little bit less, 'cause that number was from a couple years ago.

So I-

That budget number

... wanna give a little background on the fight, right? Um, and kinda discuss exactly why there are differences between a Republican elected or a Republican majority Senate and Republican majority House and a Republican governor in the state of Texas. How have we not been able to come to a conclusion on what to do, uh, with lowering property taxes in, in Texas, uh, when everybody's in the same party? So that's-

It's much easier-

... kinda where we're at.

It's much easier to spend a little bit of money or to find cuts when you need them than it is to spend a lot of money.

Yeah, I think it's a really complicated issue and, and because we're talking about a lot of money and we're talk- not only are we talking about a lot of money, but what, what we don't hear folks talk about is whatever reform they do in this, uh, biennium, they also have to be able to pay for in future bienniums, right? So property tax reform is not just a one-time expense, it's, it's an ongoing expense that, it, you know, grows exponentially over time, right? So, um, you know, that's a, that's a major concern of, of some of the players that are, that are in the room and, and having those conversations. But the, the differences. Let, let's just really quick talk about the House's plan versus, uh, the Senate's plan. Originally, prior-

Can I ask you a question real quick?

Yep.

They've already used some of the surplus to pay for the, the previous reform, correct?

That's correct. I, I don't know the exact-

Okay

... number, but I think it was like-

It was like $3 or $4 billion. It was-

It was like, yeah. I think it may have been-

Yeah

... like four or five, but yeah, somewhere around there.

Okay.

Uh, they've had to use some of the surplus to pay for what they had done before, which, uh, we actually did a podcast a while ago, and we talked about this and it, it wasn't really, uh, specific on that subject, but I did discuss that a couple of legislators said, "Well..." Legislators when that happened said, "Well, we're gonna do this, but it feels like we're kinda kicking a can down the road. We're saving money today, but we're gonna have this cost in the future, and we have no idea how we're gonna pay for that." Well, luckily, we had this huge surplus that ended up paying that $4 or $5 billion that we needed, uh, to pay for that. Are we gonna have that in two years? Um, who knows, right? Um, you know, just, just like some of our development patterns in Texas, uh, we get a little bit, uh, Ponzi scheme-ish, uh, in our legislative appropriations. We have a balanced budget. Look, it's significantly better than the, the federal government, right? But why are you laughing at me?

I'm just thinking about the, uh, the situation that they're gonna be in in the future if they make a bunch of changes that they can't afford and then have to raise taxes.

Oh, yeah, yeah, absolutely. Yeah, I mean, and, and that's, you know, kinda, kinda where we're at. So the, the, the current model that they put in place in the last legislative session was is they basically said that any growth over 2.5% in values in a school district is going to compress the tax rate, and that compression and the cost of that is going to be taken up by the state's general fund budget, right? So if my house value grows by 5%, or, it, better yet, if all values within a school, a single school district grow by 5%-Two and a half percent of that is gonna go, I'm gonna, I'm gonna pay for, right? It's gonna go to the school district. The other two and a half percent of that is gonna be backstopped by the state, and the tax rate is gonna be compressed by that amount, right? And so that's what they did. Obviously, with eight, nine, ten percent appraisal growth within that period of time, that backstop had to get pretty large to state funds. And so that's where that extra four or five billion dollars co- came from. So that's kind of what we did before. Now let's talk about what they're trying to do now. Um, two different plans. Uh, the original plan prior to special session in the House was we are going to, um, basically do the same thing we're doing now. We're gonna continue the compression, we're gonna add to that compression, we're gonna accelerate that compression to get that tax rate down even more, uh, and we're gonna put a five percent appraisal cap, uh, which I actually think was a legis-- it, it wasn't like a Prop Thirteen California idea for them politically. I think it was a budget-writing, uh, scheme, right? Because if I have a five percent appraisal cap, then I can control the compression and the cost of that compression in the state budget, whereas the, in the previous term, they couldn't do that. Um, but either way, it was probably bad policy. We've talked about that previously. Uh, you know, putting an appraisal cap in on residential properties is just, it's not a great idea. It doesn't work, uh, and it manipulates the market, uh, pretty bad. So the original plan was we're gonna compress, and we're gonna put an appraisal cap in place. On the Senate side, um, the Senate wanted to do a couple of things. Uh, the Senate, one, did not want appraisal caps. Uh, one hundred percent, um, the lieutenant governor, Dan Patrick, um, the chair of the finance committee, uh, Senator Bettencourt, uh, who we've talked about in the past, is, you know, a tax nerd and makes money off of property taxation. Um, you, you know, you-- both of them believe that, uh, an appraisal cap was, was market manipulation. Uh, and hey, we actually agree with them. It kind of is market manipulation. So, um, on the Senate side, they were against the appraisal cap. They wanted to compress tax rates, so they wanted to do a little bit of what the House was gonna do. So they wanted to continue that compression. They just didn't want to do it as drastically. And they wanted to reward two groups. They wanted to reward homeownership through a homestead exemption, um, which you only get, you know, one property with a homestead exemption, unless you're the attorney general in the state of Texas, then you can have two. Joke of the day. Um, and they also-

Allegedly. Allegedly.

Al- uh, well, he signed the form, man. I mean-

I know.

I mean, the, the form says on there you can only have one homestead in the state of Texas, and it's a, it, you know, I think it says it's a felony in the state if you have multiple homesteads. Anyways, so they wanted a homestead exemption for homeownership. So basically, they wanted to give a larger benefit to homeowners than they did to businesses and, um, and rental owner-owned occu- or renter-occupied buildings, right? Uh, and then two, they wanted to increase, uh, that homestead exemption even more for people who were over the age of sixty-five, right? Um, a, a clear, you know, that portion's kind of a clear play on voters. Like, I'm just, I'm just trying to go and grab voters, right? Um, and so, you know, and it's funny, I've had a lot of conversations with people who are over the age of sixty-five about that segment, and I explain to them... And, you know, a lot of people who are over the age of sixty-five own usually more than one property if, if they have a significant amount of money. Um, and, you know, so they, they get that benefit, but they lose that benefit on the other side. So really, at the end of the day, it kind of washes for them if they own multiple properties. But for somebody who owns one property who's retired on a fixed income, it would be extremely beneficial for them to, to have that increased amount. So that was the two plans that came out. They could never agree. There was no compromise, um, and they, they just really wouldn't even talk about it. So we didn't get it done in the legislative session. We come to special session one. The House goes into session, passes the bill without the appraisal cap, so they basically pass an all compression bill, and that's it. Uh, and then adjourns and leaves. So basically tells the Senate to take it or leave it. At the same time, the governor speaks up, basically for the first time, and says, "The House plan is the only thing that actually addresses my call. The Senate's plan does not meet my call for special sessions. Therefore, it's, uh, it can't, it can't be passed." Right? Uh, because in a special session, the governor controls exactly the legislation that, uh, that comes through the process. It's probably one of the strongest powers you have in the state of Texas as a governor. Otherwise, you're fairly weak politically. Um, and so they came, they left. The Senate was left holding the bag, and the Senate would never compromise on that. And so they basically knew that they were gonna kick this can down the road to a special legislative session. So they've gone into a second legislative session now, uh, or a special session, and we, um... What they are looking at right now is, is somewhat of a compromise, um, and maybe they can get something done. We have yet to see the needle really move on, on where it's gonna be because the House is very insistent on, uh, direct compression reform that, that impacts all property owners, which is what was done previously. It impacted businesses, impacted renters. It impacted, or at least renter-occupied buildings, and it, it, uh, impacted homestead exemptions. There is some talk that the House is willing to compromise a bit on some homestead exemption, but not near to the value that the Senate is looking for. So that's kind of where we're at. Um, and it's a, it's a very interesting debate that is occurring in the state of Texas. So I know you have a couple comments. I'm gonna kind of turn it to you.

So one question that I had for you is on the over sixty-five expansion.

Mm-hmm.

Okay. So we're talking about expanding the school homestead from forty thousand to either seventy thousand or a hundred thousand, right? A hundred thousand kinda got thrown out there, and now that's like, that's kind of where a lot of people's baseline is, uh, just because it got thrown out there.W-what is the extra homes exemption, um, for the over 65s that they're talking about?

An additional 30,000.

How, how much more-

So it would go from, it would go from-

... on top of the either 70 or 100?

No, it would go from 70 to 100. So, uh-

Okay, so that's just for the over 65s

... they're talking about going from 40 now on, on the homestead exemption to 70.

Mm-hmm.

Right?

For everyone.

And then for everyone.

Okay.

And then it would go from 70 to 100 if you were over the age of 65. That's the senate plan.

Okay. So the actual real-world impact of that for most over-65 homeowners is a $300 a year savings perpetually because their taxes are already frozen.

Yeah, 'cause the M&O, they're already frozen. The M&O rates of school districts now are down to, like, $1.05, $1.10.

Yeah.

Right around there. You know, M&O plus I&S, right, it's, school taxes are about a, about a buck depending ... If you're in a fast growth district, it's actually compressed more, right? Um, but yeah, you're, you're spot on.

Okay. Whatever. It is what I like. I, I... So in conversations that I've had with people about Prop 13 specifically, their argument is always, "Well, what about my, my grandparents or my, my aunt and uncle who are on a fixed income?" You know? Uh, it's, it's so beneficial for them. Like, but we have kind of solved that problem here in Texas with the senior freezes.

Mm-hmm.

It's just a weird thing to add to it because it's, as our population ages and the more and more people fall into that category, um, the, like, the percentage of actual homeowners, because a lot of younger people are having trouble getting into the market anyway, like, the percentage of homestead exemptions that have that freeze is gonna continue to grow. So it's interesting to-

Yeah, I, I think the logic-

... give an even extra

I, I think you're making a really good point here about the logic and the math, right? Both chambers have good points in what they're trying to make from a, from a mathematical logic standpoint, and then both chambers also have, like, really goofy points, right? So when you talk about the appraisal cap, uh, there's a ton wrong with the logic in that math, right? So from a house standpoint, you talk about that appraisal cap, it doesn't make a lot of sense. When you're talking about, uh, giving a benefit to seniors where we have, uh, basically the ability to freeze their taxes when they turn 65 anyways, they're going to get significant compression of their, of their tax dollars based on-

Yes, because the rate is, is going down, too.

The rate is coming... That's correct. And the way our tax freeze works is, you know, it's based on that appraisal. It freezes the appraisal on the property, right? Um, and so if the, if the rate drops, they get the benefit of the rate drop. So, um, they're both not being logical in their conversations on-

Well, it's politics.

It is. It is politics, and it, it muddies the water even more on a, on a topic that is already really, really hard to see through, right?

Yeah. One of the biggest problems with this whole debate is that the a- the average person has no idea what tax compression means-

Mm-hmm

... and how it kind of affects them. And so you're already starting at a disadvantage if that's your position, is that we should just keep compressing rates. Um, it, it does make some logical sense to say if this is gonna be our strategy, then we should find ways to mitigate the potential downsides by k- by keeping that appraisal growth, um, capped at an even lower rate. Um, the, the cap that the house was talking about would be for all properties, right? Not just for homesteads?

Uh, the cap would be, uh, for all properties, yeah. That's correct.

Yeah. So we're gonna, we would be going from 10% cap only on homestead properties to 5% across the board, which gets us very close to Prop 13.

Yeah, and that, and that, and that was a, that was originally a, kind of how it was thrown out, and then, you know, obviously during negotiation and compromise, they were like, "Well, we'll just do it on residential homesteads." It kind of went back to residential homesteads, but it, it doesn't matter either way. Um, the, the impact that it would have on the free market of, of residential real estate would be substantial. I mean, just look at the impact of interest rates on, on residential, right? I mean-

Yeah

... we hit 7.25 yesterday. Uh, today's Friday, July 7th, uh, but we, yesterday we hit, uh, 7.25. Um, I'm not sure I've ever seen, uh, 30-year interest rates as a homeowner. You know, look, I'm, you know, almost 40. I'm 39 years old. But as a homeowner, I don't think I've ever seen a conventional 30 that high at this point. I think the highest I ever had was, like, 6.25, was the highest rate I'd ever had. And I know some people who had, like, 6.75. So we're, we're in territory now where people, you know, just the, the, the market manipulation that is occurring within the residential market, we're gonna see some... I, I think we're gonna see some deflationary trends, or at least some slowing trends is the better way to say it, in residential real estate because of interest rates.

We're already seeing it, yeah. We're seeing it slow, for sure.

Yeah. We're seeing it slow. But, um, you know, I, I think it's also, y- you talk about compression and people understanding compression. I think we need to put that in terms that people understand, right? Um, I was at a car wash about a month ago, and, you know, of course about a month ago from now, appraisals are hitting mailboxes, right? End of May, mid-May, appraisals hit really hard in mailboxes, and people start to freak out about their appraisals. And look, my appraisal went up, like, 20%. Uh, we appraise every other year in Parker County, which is stupid. Uh, just no, no better word to use there. Um, and so what happens is, is because we appraise every other year, people see these just huge increases in values that occur, and, and we, we got hit with that, uh, this year. Well, I'm sitting in this car wash and this guy's like, "I can't afford to pay 20% more in my taxes." And I'm like, "Okay, hey, hold on. You're, you're not ever going to pay 20% more in your taxes. With what has been done in property tax reform to this point, it's, you're, you're not gonna get there." From a stand... And I did the math for him, like, right there, like, on a, on a napkin in the middle of a lobby while my car was getting washed, and I, I basically said, "Okay, hey, your value went up 20%. Okay, great. By law, your city, without going to the voters, which no city i- in Parker County has done or will do, right, can only go up 3%. Okay?"

Three and a half.

Sorry, you're right, three and a half. Your city can go up three and a half. Your school districts by law can only go up two and a half, and then they have the compression of the old system that was there, right? So when you take that the school is $1.10 of his tax rate and, uh, you know, the city and the county and everybody else that are at that three and a half percent cap are another 60 cents or so, right? So you're at $1.70 total. He's really only gonna go up about 2.9%, uh, in, in his wh-his whole tax bill, right? So wh-when I said that to him, he was like, "Oh, well that's, that's not bad. I mean, inflation's like eight or nine percent," right? Or seven percent, wherever we are right now. But anyways.

It's like four percent. Yeah.

Yeah. But either way, like, you know, it's... We don't-

But this-

... put it in terms where people can understand, like, the actual cost of it.

True. But you're talking aggregate level, and the problem with this whole system and the reason why it's still-

Oh, great topic

... so challenging is that that's not necessarily true for him, right?

That is, that is correct because-

It's-

... of the algebra of the, of the system we have.

Yeah.

Right?

It's three and a half percent on all properties, and if 65% of your tax value in your city is residential, um, and it's growing at 10% a year, and the rest of it is commercial, industrial, whatever, and it's not growing anywhere near that, then, um, the impact is gonna be felt more on those homeowners. And that's really the reason that we keep having to talk about this over and over because you're gonna get... You're gonna pay more than the 3.5% or the two and a half percent-

Right

... whatever, right? It's just overall, revenues can't grow by more than that.

Because when you look at residential appraisals in Parker County, they went up 20%, right? And I don't know what the commercial appraisals went up. We have that data, we can probably pull it real quick and look at it, but, um, commercial appraisals, you know, didn't go up 20%, right? So if they went up less and we went up more on the residential side, I'm, I'm talking residential versus commercial, right, then the algebra's gonna change, and I'm gonna have to pay more of the burden on the residential side than the commercial side's gonna pay.

Right.

So there's that unevenness that occurs which does... A-and, and you are correct. I actually said that to him and then lost him. So, um, it was a, it was a really int- I, I... And, and I made the comment, you know, "Hey, y-you know, you pay 2.9% more, but you're gonna pay a couple of ticks more because of the appraisal methods." And, you know, when I tried to explain that it was even more complicated. Um, what I have, what I think is really interesting in that though, and I, I wanna dig into this right now, what would it look like if we had a taxation system that separated those silos?

That allowed you to tax, um, residential at one rate, commercial at a different rate?

Yes.

Maybe even, maybe even, uh, other uses as well?

Correct. And, and-

Certainly you'd have, I guess, commercial, residential, personal. In parts of Texas, mineral's a bigger deal.

Right.

Um, but I mean, yeah, theoretically you could break it down by land use code too.

Correct. And so don't, don't you think that would be a better method of taxation, a fairer method of taxation?

It would be easier for you to manage the relative level of tax growth or, like-

Mm-hmm

... tax burden. Um, just to take a simple example, if you have, like, 100 homes and a Walmart and that's your whole tax base, right? That Walmart's not growing in value-

Correct

... uh, for a variety of reasons. Your homes are growing at 10%. The burden is obviously going to be shifting over even if you didn't have a cap. Right?

Well, that Walmart's not growing. Hold on, we gotta explain. That Walmart's not growing because their appraisal method is different. It's not a market appraisal.

It's not, it's... Yes. There's many different options that the appraisal district has to value that Walmart, and that Walmart has significant resources to fight those appraisals, right? And it's, it's just not quite as clear. I mean, there are legitimate reasons to say that y- that a Walmart's valuation is more complex than a, a residential homestead, right? There's a, there's a much broader market for that type of property than for a 200,000 square foot concrete block on, you know, that sits behind 15 acres of parking. There is a fair argument that the appraisal meth-methods probably should be different. The question is what method are they using? Are they using, like, the value of the building as, uh, as it stands now, as it would stand, like the dark store theory, if Walmart left? Uh, are they looking at the actual income producing aspect of that property? No, 'cause if they were, then they, they would be increasing. We have the sales tax data. We know that their, their, uh, their sales are increasing on an annual basis. Um, but because they have that flexibility, uh, as an appraisal district, they can opt for a different method when Walmart comes calling to protest. Um, but the end result is that your Walmarts, your Lowe's, whatever, those big box stores, they're not increasing in value on an annual basis anywhere near the rate that a residential homestead is. So even in a world where you didn't have caps or compression or anything else, the relative burden is shifting to residential homeowners because their valuations are growing faster, okay?

Mm-hmm.

If you kept the tax rate the same, if you didn't have any caps, that's what's gonna happen. When you add that cap, that three and a half percent cap, on top of it, it has an additional, uh, burden-

Shift

... shifting effect, right? Yeah, I don't really remember exactly how we got here, what, what we had talked about. Um, but at the end of the day, that homeowner is not going to be paying only a three and a half percent increase. They're gonna be paying probably an eight percent increase in taxes on their, on that city portion or, or something like that, but it is not gonna be the full 10 or 20%.

So how we got here was the question of... is putting those into their own silos-

Okay, yes

... by use codes a better method of taxation or a fairer method of taxation?

Yes. So in that circumstance, maybe the residential tax rate drops by six or seven percent, and the commercial tax rate basically stays flat.

Right.

This adds quite a bit of complexity to your tax code, uh, or to, yeah, to your, to your tax rates.

But, but does it? I mean, re-re-really, really, really, does it?

I guess it would depend on how granular you want it to get, and, um, if you just kept it at a high level, anything that's residential, which could include single family detached houses, it, I guess, could include apartments, condos, things like that, and then anything that is income producing or commercial.

Mm-hmm.

Y- maybe you could have an argument that things like apartments are income producing. Um, but if you just separate it where, like, people live here and people do business here, and that's kind of your demarcation, then it wouldn't be too... Just an, uh, one extra tax rate. If you wanted-

I mean-

... to get into, like, super detailed levels of this type of business or land use is taxed at this rate, this type of land use is taxed, then you're gonna have fights about am I properly coded? Am I... You know, d- like, the protests are gonna be even more outrageous.

I mean, maybe, right? But when you, when you talk about difficulty level, you know, our property tax system right now is not super complicated, right? It's... And, and because of that lack-

It's pretty complicated

... of complication. Eh, I mean, we appraise it, right? We have a cap. There's a rate, right? You figure out the millage.

The math is easy once you get there-

Right

... but everything before that is hard.

A-a-agreed. Um, but, like, sales tax is very, very complicated. There's a lot of different statute on sales tax, right? There's a lot of-

Right

... different things in sales tax that are just very complex, and how taxation occurs and when it occurs and where it is placed and... You know, property tax is not near that complicated, and you, you could still silo property tax and still be less complicated than we are with sales tax, right?

Yeah. Uh, no, I, I agree. And in fact, if you were to do that, which we've talked about before.

Mm-hmm.

If you were to do that, you could probably get rid of a lot of the complexity that happens before you get to the actual calculation of what you owe.

Mm-hmm.

The biggest pushback that you provided whenever we first talked about this was that the business side, like, there'd be a fear maybe that cities would kind of stick it to businesses because they don't vote.

This was, this was prior to the 3%, right? The, or the 3.5% cap.

No, no. Well, yeah, but I think we talked about this maybe two years ago.

All right.

Um, or may- it would've been, like, right after SB2 was passed. Um, but when, when I brought up the idea of possibly separating tax rates by use, that was your, y- that was your first pushback, is that, um, there would be concern that cities could stick it to the commercial ta- uh, taxpayers because they don't vote. Um, maybe they're not even, like, local businesses, right? They're just national chains. And so-

Mm

... like, they don't have a, maybe a presence in the city. So it, it would maybe be easier for them to just offload things to that commercial tax. Um, but I, I do think that if you could come up with a system like that, you could probably get rid of a lot of the complexity and a lot of the, the just weird edge cases that keep coming up, that keep pushing the legislature to do some other kind of reform and kind of add on a new Band-Aid to what we've already done.

Yeah, I, I just think it's a, it's an interesting concept, uh, because ultimately the problem is the rising cost of property taxes in Texas, right? Like, that's the problem, and we keep creating solutions that actually exacerbate the problem. And, and-

You know what would be a really good solution?

What's that?

If we built more housing.

That's a joke, everybody. That's a joke, right?

No, I, I mean, it, it is, yeah. It's-

Yeah

... kind of a cheeky thing to say, but it's true. If we built enough housing to keep up with the thousand people that move here a day, then we would not have the soaring home values. The problem with that is that we have built an entire economic model that is based on people owning homes as their primary instrument of saving and wealth creation, right? So it benefits the individual to not allow homes to be built so that their home values increase. It's not the only reason that home values increase, but it is a big reason why home values increase.

Yeah.

Um, right? So there's an incentive for the individual homeowner to oppose new housing, and there is a big detrimental impact on the community at large when you don't allow enough housing to be built.

Yep.

So there's this tension here, and this is the b- this is one of the biggest problems with Prop 13 too, like, um, 'cause as we've been talking to Michael about, like, how it actually works at a granular level in California, one thing that kind of stood out to us is that it's to the city's benefit to have homes sell and to have the actual people that live in your city turn over frequently, because the second that house sells, you get to recapture all of the valuation growth, right? So if you have a house that maybe sold in 20, you know, 2008, right, like, right, right as the market was taking a downturn, so that house sold for $500,000. Today it's worth $2 million.

Mm-hmm.

It's only being taxed at maybe 600,000, so you're missing, like, $1.4 million worth of tax value. The second that sells, you recapture all of it. So it's to their financial benefit for everyone to just move out of their city-

Yeah

... because they can recapture all that lost value. But then you, you don't have a cohesive community, right? So there's, like, a real incentive mismatch-From an economic standpoint and from just a community cohesion standpoint. We don't have that exact model here, but we have a similar issue, um, where the individual incentives of the homeowner are not aligned with what would be best for the community as a whole, which is to have enough housing for everyone, right? And you can kind of maybe push that to the other city. Like, we don't have to have enough housing or any build any more housing in my city because, you know, we'll just kind of push that, uh, to-- across the city limit line and let, let our neighbors deal with it. Um, but we're gonna keep our city the same. But if everyone has that same mindset, then we're not gonna build enough housing generally. So then property values continue to grow up, then we don't wanna pay those tax bills, and so we gotta figure out something else to do about it.

Yeah. I, I think it's-

I, I would prefer a situation where we can align those incentives together so that we're, like, moving in the same direction, right? We're solving the problems in the right way versus trying to solve them sort of after the fact.

I, I, I think that's a fair statement. I, I, I think... I think if we could align those kind of policies, then we could do a better job of fixing both issues. It, it's a little hard to do that because not everybody believes that that's the, the path we wanna go. You know, in Texas, for example, there's a pretty large contingent in even the Republican Party, uh, or in the Republican Party here that they don't wanna grow, right? They don't want the thousand people a day to come to Texas. And that contingent has been growing for years, um, in the state, continues to get larger and larger. Um, in Florida, that contingent has grown so much that Florida has basically removed all types of incentives, uh, for businesses to move into their state. Um, really gonna be a good case study over the next couple of years to see what happens in Florida. So, because if it doesn't change anything in Florida, I think you'll see a lot more conservative legislatures get rid of incentives, right? Um, so, but I think you're right. I think the policy is developing, it's developing incentives maybe in the wrong spot, especially when you're looking at Prop 13. It's, it's creating disincentive to, uh, to invest in your property from a square footage standpoint. It creates a disadvantage, uh, for moving. It creates a, you know, it just, it creates a disadvantage for the market to build additional housing. Um, you know, there's, there's, it, it, it's a very interesting, uh, look at that, but it saves taxpayers a substantial amount of money on property tax. Now, that being said, that's not really where the state collects most of their taxes though, right?

Not the state.

Most of property tax in the state goes to the schools in Ca- in California. So, you know, the state itself is making most of its money on income tax, which we don't have in Texas.

Oh, I thought you were, I thought you were talking about Texas, sorry.

Yeah. Yeah. Which we don't have in Texas. Texas has the same thing, property tax for the school system, uh, but really it's a statewide tax. When you look at how the funding formula for schools work, you have other... On the M&O side of the tax rate for a school district, it has little impact on how much money the school district itself gets, right? They're gonna get a per pupil calculation based on some state formula. All that money kinda goes up to the state and then comes back down to the locals. The I&S rate stays local.

Yeah. The difference is they're like magic pennies-

Yep

... largely. Um, but I tried to read through the school funding thing a year or so ago, and I, I half understand it.

And if you half understand it, I mean, there's-

I'm sure there's someone out there who understands exactly how it works.

And they get paid a lot of money.

Yeah.

So-

Yeah. Me, on the other hand, I do not get paid to understand how that school funding works, so.

Yeah. That's, that's, that's one area of the taxation business we're not in. Um, but I mean, ultimately, you know, property tax reform in Texas is gonna take an interesting turn, and we don't really know what that looks like. Um, but my, my comment is, yes, we're gonna see a reduction in our property tax bills. They're gonna pass something before September. Um, so we're gonna see a reduction in our property tax bills this year, um, or at least a compression. But is that long-term the solution? We're still going to have... And is the state going to have the surpluses to continue to try to put band-aids on this?

Yeah. I mean, a lot of the surplus that we had this year is from, uh, was from COVID money, is from, uh, the inflationary impact on sales tax because we didn't have a slowdown in consumer spending-

Mm-hmm

... over the past couple of years. Um, it's probably pretty risky to gamble that that's gonna stay, uh, the case over the next couple of years.

And there's a substantial economic concern with the restarting of, um, student loan payments, right? 'Cause that's putting hundreds and hundreds of dollars in people's pockets, which they're probably spending on retail goods, right? There's a concern that we're gonna see a slowdown in retail spending as well, which is gonna have a direct impact on sales tech dollars. We'll see whether that actually occurs or not.

If you benefited from the student loan freeze and you weren't putting that money away somewhere, I pray for you.

Well, Dave Ramsey. Well, Dave Ramsey. Not everybody, not everybody's gonna do that, right? Um, and yeah, I mean, it's ultimately, I think we're gonna find out real fast, right? But there are major retailers out there that are basically saying, "Hey, we, we believe retail sales are gonna slow, uh, because of this, and, and that's where it's gonna go." Now, that doesn't change the fact that, you know, it's, it's a loan somebody took out, they have to pay it back. Like, I'm, I'm not trying to make an argument of whether this is right or wrong or indifferent or anything like that. Like, I, I'm just, I'm saying that it, it's gonna have an impact on, on what sales tax volumes are for local communities. So we're, you know, those policy decisions, just like these property tax policy decisions, these policy decisions have an impact on, um-... on what the revenue source, uh, for communities is going to be. So it's gonna be interesting as- over the next year, it's gonna be fun to watch what happens with property tax reform and what happens on sales tax side. Uh, but I think we're in for a little bit of a slowdown, which, you know, I thought we'd be in for six months ago, and we, we haven't seen it yet. But I, I think we're about to, we're about to feel it. This could be that, you know, I don't think it's gonna be a 2008 holiday, but, uh, it kinda feels like we're about to go into October of 2008 here, and we're gonna start to see, see some slowdowns.

I don't know. I've adjusted my priors at this point because we haven't gotten there yet, so.

Does that mean it's gonna be stiffer-

My, my confidence-

When we do get there?

My confidence in my assessment that we would hit some kind of recession is lower than it was a year and a half ago.

Oh, wow.

When we had-

Okay

... when we had two straight quarters of actual grow- uh, decline, and we had, like, a technical recession, but job numbers were still okay and things like that, so they didn't call it a recession, um, I felt pretty confident that we would be getting to that point where we would have, like, an officially called recession within a year, 18 months. And we're, like, 18 months out of that now, and so, y- my, my... Like, if I had to put a number on it, it would be a lot lower now than it was then.

Okay. We're at such a funny place as a, as a country, right? Like, this week they released layoff numbers and, uh, job growth, private payroll job growth, right? And layoffs slowed, and private payroll went up. Do you know what the market did?

Went down.

Went down.

Yeah.

And the market went down because with strong job numbers, they believe the Fed is going to raise rates again, right? Which the market believes as we continue to raise rates, it means that we're gonna, we're gonna hit even harder if rates are higher, right? I'm not sure that's the case. I think the Fed believes that it gives them more room to lower rates in the future. Um, but I, I feel like, I just... I kinda felt like three months ago we were decelerating as we were coming in and landing, and it was gonna be a little softer, but we were gonna have a little bit of recession as we landed that plane. And I feel like we're coming in at, like, full speed here on a flight deck, and we don't know if we're gonna catch the cable or not.

We have to pull up there at the last second. Um-

Yeah, I mean, you gotta go full speed because if you don't catch the cable, you, you gotta get, you know, as quick as you can off that deck, and that's gonna be... You know, I think, I think they'll end up having to drop interest rates faster than they ever were when they were going up.

Which would be something, 'cause it's a pretty quick increase. I don't know, man. It's, it is a wild time. I think it's, I think it's a cautionary tale about the way that we focus on certain economic things, right? We kept rates at basically zero for, like, 15 years almost, and we had growth, but it caused some instability in areas we didn't expect, right?

Well, it injected a lot of cash into the system.

Yeah. Tying back to the last part of the conversation, we, we built an entire, like, national financial mortgage market. Like, everything became financialized. And it allowed us to make home ownership one of the most important things for people's financial health. Um, and that had knock-on effects, too, which we just discussed, right? It's like there's always unintended consequences for these things that, that you can't predict and that can kind of bite you in the butt down the road, so.

So D.R. Horton-

Or, like, right now.

So D.R. Horton cut the price of their homes about six months ago. D.R. Horton basically cut the price of their homes by 15% across the board.

For new construction?

They are more... For new construction. They are more profitable now than they were last year.

They're selling more?

They're selling more. The cost of materials has gone down, right? And that's how much margin was built into the housing market during a very hot period of time, right? So there's been a, a rebalance, and maybe that's just one industry, and we're seeing that in multiple industries at the same time, like that rebalance is happening in other areas, too. And you're right, maybe we're not gonna hit the flight deck as hard as I think we will. Um-

So I saw an interesting thing this yesterday, too. You can keep... I'm gonna pull this up. You-

Yep

... you can finish your thought.

So I just... I mean, I, I think there's a possibility that you could be right that we have a softer landing because maybe the market has adjusted to the fact that cash flow and availability of cash has tightened. Um, but consumer debt is still going up, and at some point we're gonna have to have... The, the consumers have not yet made an adjustment, right? Ford repor- reported that they had one of their best sales quarters, you know, in, in their history on F-150 trucks, F-150 electrics and Mach-Es, right? So those are all expensive vehicles. They're still selling those cars at, you know, higher interest rates. Um, and so there's, there's going to be a point at which it, it just seems like it's, the faucet is going full blast on consumer spending money, and it's not gonna be, like, a gradual spin of the, of the handle to slow it down. It just feels like everything's gonna shut off. Um, at least in my opinion, that's where I, I feel like we're headed. What article you got?

Okay. So this is an article on Yahoo! Uh-

You still, you still go to Yahoo!?

No, I found it... Someone posted it on Twitter.

Okay.

The ar- the article is about it's about a TikTok person, but she went to Buc-ee's and saw the, uh, you know, they have, like, the big placard with all the, the incomes and wages that they offer for their various employees.

Mm-hmm.

And, like, the janitors make 18 bucks an hour. Um, like, if you are a manager of a Buc-ee's, you can make well over, well in the six figures.

Oh, yeah.

Um, and we're seeing a lot of that in, like, the service industry. Like, you can start at Sonic for 15 bucks an hour or Taco Bell. So, like, um, I know that, like, landscapers and-Other, other types of work that are more labor-intensive and like being outside, especially here in Texas, like they're having a really hard time keeping employees. But the article here is talking about the fact that like the janitor at Buc-ee's is making more than she is as like a, a case manager at whatever, wherever she works. Um, so there's like an interest-- it's almost like a yield cur-curve inversion. It's like a, a, an inversion or a shift where, uh, just service jobs, um, are paying more than like white-collar jobs in some cases. Um, which I think is-- has interesting effects probably moving forward if that trend holds.

Well, I think a lot of that is, is the change in the service industry that's occurred after COVID, right? Uh, tipping is a, is a primary example of that. And I worked in a service industry, so I've always been a strong tipper, but I did run across something very interesting, uh, earlier this week playing a baseball tournament, and after the tournament, we went to Torchy's, uh, tacos, uh, taco chain in Texas for those who aren't in Texas. Uh, Austin-based, I have to say that out loud for Chad. But when we paid, you know, it's, it's very common, it's a quick service restaurant. You go to the counter, you make your order, and then they just have somebody run out their food. You get your own drinks, all that type of stuff, right? Quick service. When we paid, it asked, "Do you want to tip?" And it gave me a fift- it gave me a fifteen, twenty, and twenty-five percent tip line. It did not give a no-tip line without pushing like a button in the right corner for other. And, you know, obviously you gotta push other than, you know, enter in either zero or some other number, right? I thought that was interesting, and the reason I thought that was interesting, not because I don't tip, I actually do kinda tip at quick service, uh, and that could be debated with a lot of people I know. I have some friends that are like, "I can't believe you tip at a quick service restaurant." It is what it is. I used to bartend and wait tables, and that's how I got through my first couple years of college, so I just, I, I tip in the service industry. But if they're making fifteen percent on average of, on the total sales volume of a, of a Torchy's, right, and that's being tip shared out to the employees, by, by state law, they have to. If it's a tip, they can't give it to a, a manager that gets you in a lot of trouble. Um, they're making a lot of money 'cause they're sitting behind-- they're working at register working fifteen dollars an hour, right? And, you know, a, a Torchy's is, uh, you know, is easily, you know, pulling in two to three million dollars a year in sales probably. It's probably three to four, it'd be my guess. I mean, you're talking about that fifteen percent average, my goodness, they're, they're bringing in another six hundred thousand dollars a year in money that gets distributed through wages to those employees, and they probably only have like twenty-two employees at a store.

Yeah. You'd probably have to, you'd probably have to make a much lower assumption on the actual amount of tip that they get.

There's no other option. There wasn't a no tip option.

You said you could push the button and say no.

No, no. There's no no button. There's an other button.

Right.

So you have to push the other button and then type in the number that you wanna tip. So if you don't wanna tip, you just have to push zero. It, it was, uh, it just is what it is. But my comment is, I would be interested... I, I would really be interested to know, like maybe a publicly traded company would do that, but I would be really interested to know like how much money they're bringing in through the tip line. Because if that increases your hourly wage to twenty-five or thirty bucks an hour-

Wow.

You're making pretty good, you're making pretty good money in a highly unskilled job. So just, you know, my, my two cents. If I was, you know, nineteen again, or twenty-one again in bartending, it, it's just a...

Yeah. I remember I made like seven bucks, seven twenty-five, whatever the minimum wage was, plus I'd get like some quarters for each sandwich.

Yeah. We made two thirteen. When I worked at Pappadeaux, we made two thirteen an hour plus tips, right? Worked all on tips. I would work a Friday night, a Saturday night, and a Sunday swing, and I would usually go back to College Station with, you know, three hundred and fifty to four hundred bucks in my pocket, uh, from tips, right? So made pretty good money, but I worked a lot of hours to, to do that. But it, you know, it was-

It's hard work.

It was hard work. It made it livable though in college. So I don't know, just it'd be interesting. We got on a total tangent there.

Yeah.

So, but anyways, I, I, I felt like it was important to come in and have a conversation on property tax and kinda get the details on what's going on in the legislative session. I, I'm not sure we're really gonna find a solution anytime soon. They're going to fight about this, uh, I think next week. They're kinda really gonna get at it, uh, and we'll, you know, get some direction of what they're gonna wanna do. But the governor's gonna come out. You know, we didn't talk a lot about the governor. The governor has basically come out and endorsed the House's version, right? Uh, he believes the compression should be how we've done it historically. It already works in his mind and, and we should continue to just work that same compression and just accelerate it with more money. So that's it for me, man.

Well-

You got anything else?

That's it for you. No, it's been, um... Got a pretty good length here, so we can probably wrap it up.

Well, I hope everybody's enjoying their summer and, uh, you are able to listen to this one. I know for sure we're not gonna be able to make another one for like three weeks 'cause we're gonna be on the road, uh, both of us. But hopefully we'll come back, uh, after this next, uh, special session, we'll have something to talk about. And then we'll have some updates as we get into the, um, the throes of getting budgets approved and looking at budgets, uh, and where things are gonna go from there, so we can come back and give you a little update on some sales tax information and some other things we're seeing statewide. Uh, but other than that, Chad, I think that's it.

All right. Thanks, Pat.

All right. Thanks. You kinda sounded like Pee-wee Herman there for a minute. "Thanks, Mason."