They own some of the most coveted real estate in the city of Austin, sprawling expanses that line the shores of the Colorado River in West Austin, yet they pay no city taxes.

Take Bob Gregory, owner of local waste management giant Texas Disposal Systems and owner of a $3.8 million, 6,010-square-foot home on a 1.5-acre spread about a mile upstream from Tom Miller Dam.

While the average Austin homeowner paid $1,343 to the city in property taxes last year, Gregory paid nothing for police, emergency medical services and other city services. Gregory, who declined to comment on this story, owns one of an estimated 400 Lake Austin waterfront properties with an average value of $2.1 million that are in the city limits but have never generated a dime for the city's tax rolls.

How did so many of Austin's elite get exempted from paying city property taxes? It started more than a century ago when the state authorized the city to annex the Colorado River's shores extending roughly 22 miles from the city's center to maintain the shores in hope of improving the river's water quality. When Austin annexed those properties in 1891, city leaders included a concession that the city would never be able to provide basic services to those living there. So, anyone who chose to live there would not be subject to city taxes.

The exemption made by Austin's late 19th century city leaders — who never envisioned a sprawling tech metropolis with multimillion-dollar estates lining the iconic waterway of its western reaches — has remained on the books to this day. It was codified in 1986 after the city made an attempt to begin collecting city taxes.

The tax exemption is only applied to Lake Austin's waterfront properties, of which some are humble boat docks with estimated values in the tens of thousands of dollars. But the vast majority are homes like Gregory's — idyllic mansions with values as high as $13.5 million, according to Travis County property records.

The city's 2018-19 property tax rate of 44.03 cents per $100 valuation is expected to generate $665 million overall.

An American-Statesman analysis of hundreds of property records found that 400 properties with a collective value of $843.5 million continue to enjoy the riverfront tax exemption. These homes would have generated roughly $3 million in tax revenue for the city in 2018.

Current Austin City Council members only recently became aware of the exemption after a couple who own a $3.7 million home on the north shores of Lake Austin, abutting the eastern edge of Emma Long Park, found out they were not getting the same deal as their neighbors. The couple sued and council members learned that what they initially thought was an isolated error included numerous homes.

"We have low-income homeowners selling their houses if they can't afford property taxes, and parts of West Austin aren't paying any city taxes on their multimillion-dollar homes at all?" Council Member Greg Casar said. "It's just indefensible and it's time to fix it."

Exempt since annexation



In the late 19th century, state lawmakers authorized the city of Austin — then a burgeoning capital city of 14,575 residents — to annex 22 miles along the Colorado River west of the city's center. Since the city pulled its drinking water from the winding body of water, the Legislature gave the city domain over its shorelines, specifically land under 504 feet, 10¾ inches above sea level.

It created a meandering outline of Austin's city limits, showing how enclaves such as West Lake Hills have jurisdiction up to a strip of lakefront property. Those city limits were reaffirmed in Austin's 1928 city charter.

By 1985, hundreds of homes and other structures had been built along the lakefront. In the fall of that year, the city of Austin sent notices to residents that they had been added to the city's rolls and would soon be taxed.

Lakefront residents were blindsided by the notices, said local attorney Terry Irion, who represented about 150 of them. Many were unsatisfied with the level of service provided by the city. Previous ordinances said Austin would only tax properties there as services — such as water, wastewater and trash — became available.

A house fire in December 1985 exacerbated lakefront residents' anger over being taxed by the city, Irion told the Statesman. It hit a crescendo when TV and radio personality John Henry Faulk, the man for whom the former central library was named and a regular on the TV show “Hee Haw,” held a press conference decrying the city's attempts to tax residents when fire services were not being provided adequately.

"He was an eloquent public speaker, and ... (there was) this press conference on the burned-out hulk of a home," Irion said.

Under that pressure, the City Council on Jan. 30, 1986, voted to exempt all those properties from city property taxes. The first vote was 4-2, but when it became apparent that the split vote would not allow the ordinance to apply immediately, and those properties might be subject to city taxes because of a Jan. 31 deadline, the dissenters switched their votes, Irion said.

Then-Council Member Charles Urdy was one of those who changed his vote. At the time, Urdy questioned whether the ordinance would remove those properties from the tax rolls.

"No," Irion replied, according to the minutes from the meeting.

In an interview Tuesday, Irion said his recollection was that he was referring to other taxing entities. (The Lake Austin waterfront properties exempted from city of Austin taxes do pay taxes to several entities, including Travis County, the Austin school district and Austin Community College.)

Urdy told the Statesman that he remembered the whole issue being muddled.

"It was a troublesome thing in that we didn’t really know what we were doing," Urdy said.

Lakefront property owners quoted in the Jan. 31, 1986, edition of the Statesman were obviously elated.

"I'm tickled to death the City Council acted the way they did," Bill Hart, the president of a neighborhood association representing many residents on the north side of Lake Austin, told the paper. "We thought it was an issue of fairness, and the city apparently agreed with us."

Lawsuit sparks policy review



Nicole and David Zern learned that they were paying city of Austin property taxes their neighbors weren't at least as early as September when they attempted to have their home deannexed from the city. The city did not respond to their request, according to their attorney, and they sued Jan. 23.

The Zerns’ lawyer, Danielle Hatchitt, told the Statesman they are seeking taxing fairness. But their lawsuit might play spoiler to Lake Austin waterfront property owners such as Bob Estes, a PGA golfer who owns a $1.8 million estate down the road from the Zerns' $3.8 million home. Estes didn't immediately return a request for comment Friday afternoon.

No other city in Travis County does anything similar to Austin's Lake Austin property tax carve out. None has created similar agreements, and in Austin, nothing else approaches the break these Lake Austin homeowners get, said Marya Crigler, chief appraiser for Travis Central Appraisal District. In other cases, if a taxing entity did not collect tax from a nonexempt property in its jurisdiction, it was a mistake.

"The county sometimes forgets to notify us when things are added" to the tax rolls, Crigler said. "But that would be the only other occasion when something would not be taxed."

It appears the Zerns' property on Manana Street is an outlier because it was annexed in 1941 via the same action that annexed the land that became Emma Long Park, according to their lawsuit. They are seeking to be removed from the city's tax rolls, like their neighbors. They have asked for $50,000 to $100,000 in refunds for the property taxes they feel they should been exempted, according to the suit.

While the Zerns do not receive water and trash services most Austin residents enjoy, they also aren't charged the monthly fees for those services that Austin Water and Austin Resource Recovery customers are. The Zerns do get police and EMS services, which are funded by property taxes.

"It seems unfair for anybody, whether you live on a mansion on the lake or a smaller home in another part of Austin," Hatchitt said. "If you are not getting city services and (the city) has no intention of giving them ... you should not be taxed for them. You should not be taxed for something that you are not receiving."

What's next?

The City Council will consider repealing the 1986 ordinance at its June 20 meeting.

Casar also is proposing a resolution to study dedicating tax revenue generated by the Lake Austin properties to helping homeless people, mental health initiatives and child care. The City Council has made homelessness and mental health a top priority in recent years, so directing the new revenue to those issues seemed natural to him.

"These dollars — it is indefensible that we have not had funding streams from these properties in the past," he said.

But it is unclear how much of these properties the city can tax. The 19th century Lake Austin shoreline annexations were based on elevation levels, not the property lines of homes that did not exist at the time.

In the case of Gregory, the Texas Disposal Systems owner, county records show about 60% of his Lake Austin property is in the city of Austin. The rest is considered outside of Austin. A spokeswoman for Gregory said he was not available for comment. Estes did not respond to a message seeking comment.

Irion, the lawyer who lobbied to get the tax exemption codified in 1986, said its likely repeal might earn him some credit for an esoteric ordinance that slipped under the radar.

"Maybe the people I helped in 1986 or have moved in the since then will come to appreciate what I did for them," Irion said.