How a Property Tax Cut Could Affect Different Texas Communities

A major proposal to reduce property taxes passed the Texas House this week, setting off potential conflict with the Senate.

The House plan proposes to inject $12 billion into school districts to reduce taxes for homeowners and businesses; but how it would work out in practice has caused considerable dissension among Republicans in Massachusetts.

City

House Bill 2, a $12 billion proposal that could give Texas property owners significant tax cuts, was approved Thursday with ease in the House. Under its provisions, tightening appraisal caps and expanding them to commercial properties could offer homeowners substantial tax breaks; according to its proponents, homeowners who experience an annual home value appreciation rate of 5 percent could save $542 in 2024 and $733 annually by using this legislation.

Critics argue the bill could actually raise property taxes by encouraging homeowners to hold onto properties longer, taking advantage of appraisal caps in order to continue driving up housing prices and thus costing cities, counties and school districts more in property tax due to rates set according to appraisal caps.

Texas property taxes generate over $170 billion each year for public services, with local school taxes accounting for more than half the money Texas uses to fund its public schools (the remaining portion coming from state and federal funds). Texas ranks near the bottom in property tax percentage as a share of personal income.

Lawmakers are keen to cut property taxes this session, with several bills proposing lower rates on both residences and businesses. But as bills move through the Legislature, questions still exist regarding who stands to benefit and how those benefits might be distributed.

This year's most significant proposed property tax cuts target lower-income households. They include increasing Texas' homestead exemption, the percentage of homes not taxed by counties and cities and appraisal caps that cannot be taxed directly by them, as well as appraisal caps - measures which could make a real difference for 80% of Texas households earning under $165,500 annually.

Other property tax proposals target specific taxpayers or address problems with the state's property tax system, like state Rep. Diego Bernal of San Antonio is pushing to limit how much short-term rental homes like Airbnb and Vrbo increase homeowners' property tax rate, while there have been multiple proposals that seek to replace school property taxes with state sales taxes, thereby shifting more of the burden for state services onto households that lack disposable income; but sales taxes could also become more volatile than property taxes, leaving it susceptible to future economic downturns.

County

Texas' historic budget surplus has spurred proposals to invest billions into property tax relief measures. City and county property taxes account for most Texas homeowner bills; therefore this plan remains most popular.

It would slash local property tax rates by about 7 cents, saving an average homeowner $500 per year in property tax payments to cities and counties for services like police, fire, road maintenance, parks and libraries. The bulk of that savings would come from reduced levy rates that cities and counties use to pay for such things as police protection, fire fighting services, road maintenance contracts and parks maintenance contracts.

Reduced levy rates could save cities or counties the equivalent of two full-time firefighters each year, but for Travis county in particular the greatest savings could come from eliminating the current cap on local property tax growth - currently set at 10% annually, regardless of its market ("appraised") value; proposals in the Legislature to reduce this limit are currently gaining steam.

Lowering the appraisal cap could have unintended repercussions, particularly in wealthy or gentrifying neighborhoods that already experience faster property value appreciation than other areas. "As we reduce the appraisal cap, those gains are mostly going to benefit people outside of our constituent base," noted Rep. Chris Turner of Grand Prairie's Democratic party. Renters and first-time homebuyers could face higher property taxes as school districts, cities and counties attempt to make up for lost revenues with additional fees or assessments.

Other proposals to lower property taxes seek to shift the burden onto businesses rather than homeowners. One proposal by Senator Tan Parker of Flower Mound would reduce business personal property tax by 20% - potentially saving companies over $1.5 billion!

Leveraging state money to maintain school funding while simultaneously lowering local property taxes could prove costly during leaner times, which is why some lawmakers advocate shifting more of the state's sales tax into property tax - as this would put more of the burden on low-income households that don't use sales tax exemptions.

School District

As property values increase, local taxing entities often do not decrease their rates in proportion to this increase, forcing families to pay increased property taxes over time. It was this issue which drove voters to approve a statewide school maintenance and operations property tax - commonly known as "Robin Hood" Tax - back in 1998.

Though this measure aided Texas homeowners, it also put strain on school districts which must now manage an increase in property tax payments without receiving increased funding from state authorities.

This year, lawmakers are trying to address these concerns by diverting sales tax collections and other state taxes to local school district coffers as an offset against lost property tax revenues. But critics argue this approach could quickly become unsustainable if local taxes don't keep pace with state revenue collections.

House lawmakers have approved their own plan for property tax relief, combining it with that of the Senate to form a single bill that could give Texas homeowners and businesses an estimated $12 billion break. It will now head back to both houses for votes before returning back for final consideration in the House.

This plan would increase the homestead exemption (i.e. the portion of property value that cannot be taxed) from $40,000 to $100k across all homeowners; those 65 and over would see their exemption increased to $110,000 from $100k. In addition, an appraisal cap will limit how much property valuation increases annually; this has drawn criticism from Democratic senators who worry that in case the economy takes a downward turn, there won't be the same surplus available to cover local property tax shortfalls.

The House plan seeks to reduce school district property taxes by lowering the state's recapture payment system (or "Robin Hood" tax), which has led some wealthier districts such as Austin ISD to send back some of their property tax revenue - approximately 25% - back to the state through recapture payment systems such as Robin Hood tax. This is expected to save Austin ISD money; as it currently sends $700 million yearly through this program - approximately one quarter of their total property tax revenue is going back into recapture payment systems or "Robin Hood tax".

Taxing Authority

As lawmakers debate various property tax cuts, one proposal that would benefit older and disabled homeowners has gained momentum in Texas. If implemented, it would cut property taxes for those 65 or older and save an average homeowner about $600 annually. Both houses of legislature have put forth similar bills; both proposals are currently under review by the governor's office and other interested parties.

House Bill 991 proposes to reduce the state appraisal cap from 10% to 5%, with advocates of this legislation saying this will protect homeowners from temporary housing market bubbles such as occurred last summer and caused home values to skyrocket. But experts warn it could widen property tax disparity between newcomers and longtime owners because an appraisal cap limits how much annual increases in tax bills can occur while market (or "appraised") value grows faster than tax burden increases can.

House proposal will lower appraisal cap and school property tax rates by 15 cents per $100 valuation, which Phelan says could save $28 billion from Texas property tax collection total. Furthermore, it aims to limit recapture, which requires districts that collect more than their fair share to return some money back to state in order to ensure all Texas schools are adequately funded.

Critics contend the plan will skew property tax cuts toward wealthier Texans while widening school district inequities. Chandra Villanueva of Every Texan said this House plan makes sustainable funding even harder to attain for Texas schools: "if we are compressing local property taxes we need a plan which also brings in additional state dollars."

Elimination of the School Maintenance and Operation Tax, commonly referred to as Robin Hood tax, would provide long-term property tax relief by ending an unfair and convoluted system which punishes success while encouraging fiscal misfeasance by permitting local districts to raise property taxes beyond what they need.