A deal on property tax relief was reached during the second special session with two bills and a joint resolution signed into law by Gov. Abbott on August 9th. This report offers a closer look at the bills passed and their potential impacts.
Background
Texas is growing quickly. From 2000 to 2022, the state gained roughly 9 million residents, more than any other state, and is projected to reach 30.9 billion by 2025. Texas led the nation in new jobs last year. Texas also now leads the nation in Fortune 500 companies. But there is a flip side to this prosperity — rising market values and subsequent increases in property tax collections.
Texas Comptroller of Public Accounts
At the same time, the state generated more revenue than estimated, leading to a $32.7 billion unexpended balance from the 2022-23 biennium — commonly referred to as a “surplus.”
SB 2, the Property Tax Relief Act
SB 2 includes nearly $13 billion to increase the homestead exemption, accelerate tax compression, and provide non-homestead properties a 20% cap on appraisals for three years. Texans will vote on the bill’s corresponding constitutional amendment (Proposition 4) on the November ballot.
The main elements of the bill include:
| Tax Rate Compression SB 2 includes $12.7 billion to reduce a school district’s maximum compressed rate by an additional 10.7 cents. This accelerates the compression already occurring (although less so than House plans during the 88th Regular Session) and shifts the burden of funding schools from local taxpayers to the state. It also means that recapture districts would pay less into recapture, with less local revenue collected overall. |
| Increasing the Homestead Exemption SB 2 increases the homestead exemption from $40,000 to $100,000. It also adjusts the “over-65/disabled freeze,” which caps the school property tax bill at the level a homeowner paid when turning 65, to take into account increases in the homestead exemption. |
| Appraisal Caps on Non-homestead Properties SB 2 includes a 3-year pilot for a 20% appraisal cap on non-homestead residential and commercial properties valued at or under $5 million during the 2025 tax year. Currently, appraisals are capped at 10% for homesteads. SB 2 applies the same principle to applicable properties. |
| Increases Appraisal District Board of Directors in Counties over 75,000 Appraisal districts are responsible for providing accurate appraisal of all property in the county. A district’s board of directors is responsible for the district’s efficient operation. SB 2 increases the number of members on an appraisal district’s board of directors from five to nine in counties with populations over 75,000. Additionally, three of the members of this expanded board would be elected in a countywide election, rather than appointed by taxing jurisdictions in the county. Some have argued that the direct election of directors would make appraisal districts more responsive to property owners’ concerns over rising values. However, a board of directors may only value property according to the laws passed by the Legislature and thus lack any discretion in setting values. Property appraisals should be a professional process, not a political one. Furthermore, administering these elections may result in additional costs for counties with a population of 75,000 or more. |
The Dollars and Cents
Governor Abbott has stated that the average Texan will save over $1,200 a year, due to SB 2’s increased home exemption and compressed tax rate (contingent on the passage of HJR 2).
Based on preliminary district tax rates released by the Texas Education Agency (TEA), a property owner with a home valued at $413,338 (the average price of a Texas home in 2022) would save between $731 to $812 in a year under SB 2. Property owners with homesteads valued at or below $100,000 will be completely exempt from paying school district property taxes.
Each year in October, the tax assessor mails tax bills to every person on the tax roll. However, the constitutional amendment needed to implement the legislation, HJR 2, will not be voted on until November 2023. Therefore, the bill directs assessors to send property owners a “provisional bill” with language stating how much savings the property owner would receive if Texas voters approve the constitutional amendment and how much “supplemental tax” they would owe if it is not approved.
Fairness and Equity
Increased rate compression is likely to benefit higher-income families and businesses the most. Because tax rates are based on a percentage of the appraised value, property owners with the highest-valued homes gain the most benefit. A rate cut would also benefit businesses, which pay just over half of school property taxes. However, because businesses can adjust their practices, including changing prices and wages to increase profits, it is not certain that a boon to businesses would benefit their workers.
The current compression system also creates tax rate inequities amongst school districts in which faster-growing districts receive their full entitlement from the state with a lower tax rate than slower-growing districts.
Increasing the homestead exemption makes sense, as flat dollar exemptions lose value over time. It is also a relatively equitable way to provide tax savings. A flat dollar exemption distributes the tax savings relatively equally amongst households, with a greater share going toward the higher income groups more likely to be homeowners. Flat dollar exemptions give a bigger boost to middle and lower-class homeowners because the reduction in taxes is a greater percentage of their overall income compared to an upper-class homeowner.
House leadership has stated that the intended goal of this targeted cap is to help small businesses. However, the cap also applies to non-homestead properties, like second homes, in which property values are rising faster than 20% in a year. The impact of the cap will need to be examined in future sessions.
Sustainability
While Texans need relief from fast-growing property taxes, lawmakers should provide relief at a pace that the state can sustain over the long run. Every tax cut must be paired with an alternative revenue source to keep up the current level of state services. While there may be more people in the state contributing to tax revenue, there is also a decreased demand for state services, such as education.
This year’s property tax relief plan provided no such alternative revenue source, putting future state services at risk. Because education and healthcare are the biggest drivers of the state’s already lean budget, they are the first on the chopping block if the state can’t make up the necessary revenue.
School district tax rate compression, in particular, has serious sustainability concerns. Compression works to increase the state share of education funding each year. However, without a sustainable alternative to make up the revenue, school funding is jeopardized.
We have already seen an example of this in recent history. In 2006, the Legislature compressed school taxes, coupled with a business tax similar to a franchise tax to make up the shortfall to schools. However, the business tax did not collect sufficient funds to cover the cost of compression, falling about $5 billion short and leading to crippling school funding cuts in 2011. It wasn’t until 2016 that legislators restored funding to pre-cut levels. Given the surplus funds currently available, additional compression may not pose an immediate threat, but future hard times could pose a serious challenge to the state.
SB 3, Franchise Tax Exemptions
SB 3 provides franchise tax exemptions to certain businesses. SB 3 increases the total revenue threshold below which a taxable business would owe no franchise tax from around $1 million to $2.47 million. This would cost the state roughly $300 million per year, $600 million for the 2024-25 biennium. Franchise taxes are levied by the state for doing business in Texas and vary per year. In 2022 and 2023, businesses earning less than $1.23 million do not have to pay a franchise tax. SB 3 would increase this so more businesses qualify.
Increasing the threshold to exempt franchise taxes will be a boon to small businesses. Although reducing franchise taxes will primarily benefit high-income households making more than $166.5 thousand per year, a targeted exemption is better than an across-the-board franchise tax cut.
Renters Excluded from the Deal
All Texans contributed to the budget surplus — renters included. Renters also pay property taxes indirectly. According to the Texas Apartment Association, roughly 20% of tenants’ rent goes toward property taxes. However, renters, which make up 38% of the state, were left out of the property tax relief deal.
Landlords can benefit from rate compression, the appraisal cap, and the broadened franchise tax exemption. While some claim that any realized tax savings will be passed onto renters, there is no data to support this. In fact, during a meeting of the Select Committee on Sustainable Property Tax Relief, members asked if there was any data collected by the Comptroller’s office on the correlation between past tax compression and rental rates and no such data was available.
Conclusion
Overall, the property tax deal has a mix of positives and negatives. Homeowners, businesses, and commercial property owners will have some relief. But it is unclear whether these tax savings will be sustainable for the state in the long run. If not, the state runs the risk of cutting essential health and education programs.