On Tuesday, Senators Jane Nelson and Charles Schwertner drew much attention when they announced several major tax cut proposals, including a homestead exemption increase.
As part of our week-long series on tax policies, today we’re looking at proposals to address frustrations with residential property taxes, such as the homestead exemption increase. While many of the proposals take Texas in the wrong direction, an increased homestead exemption can help Texas homeowners.
Increase the Homestead Exemption
Senator Nelson’s proposal (SB 1) calls for increasing the homestead exemption for school property taxes from $15,000 to 25 percent of median market value of a Texas home, or about $33,000 in the first year. This would lower the school property tax bill for the average homeowner by about $240.
School districts would not lose revenue because of the increased exemption, because the state would replace the lost property tax revenue with additional state aid through the school finance system. This proposal is expected to add $2.3 billion to the cost of state aid in the next biennium.
This flat-dollar-amount exemption results in all homeowners in a school district seeing the same dollar-amount reduction to their tax bill. Flat-dollar exemptions concentrate the benefit of the reduction on owners of lower-value homes, who may be more likely to have difficulty paying their tax bill. A $240 reduction in tax responsibility would make more difference to a lower-income family than to a higher-income family.
In addition to increasing the school homestead exemption, allowing local governments to offer a flat-dollar-amount exemption can make our property tax system more equitable. Both proposals benefit all homeowners, especially families who own lower-value homes.
Lowering Appraisal Cap Shifts Tax Responsibility
Another potential tax policy issue being proposed this session is the idea of lowering the appraisal cap. Current law limits the rate at which the taxable value of a homestead can increase from one year to the next to 10 percent. This appraisal cap is intended to prevent sticker shock in property tax bills, but the benefits go disproportionately to higher-value homes. Protecting high-value homes shifts local tax responsibility onto lower-value homes, renters, and businesses.
The Legislature must be smart about any changes proposed to the property tax system, which is the primary revenue source for public schools and local government services. Lowering the appraisal cap even further won’t address the real source of the problem—overreliance on property taxes to fund public services—particularly to make up for inadequate state support for public education. The $4.6 billion package of tax cuts announced this week risks Texas’ ability to invest in services and programs that all Texans need, such as quality public schools, hospitals, community colleges and emergency services.