Changes to Improve the Property Tax System

This is an updated version of a blog published January 19th, 2022. Read that blog post here

Wherever we live in Texas, local property taxes support the essential public services that we all need, whether we are Black, brown, or white. Property taxes fund our schools, police departments, and parks. But our property tax system is badly in need of fundamental reforms that would allow local governments to grant progressive homestead exemptions and improve the accuracy and efficiency of property tax appraisals and appeals.

Flat-dollar local homestead exemption

The most equitable method for reducing property taxes would be to give local taxing entities the ability to choose to offer a homestead exemption, like the one the state requires school districts to adopt. In May 2022, voters approved a constitutional amendment to require all school districts to grant a homestead exemption of $40,000 — an increase from the prior statewide exemption of $25,000. The homestead exemption granted by all school districts — known as a “flat-dollar exemption” — reduces the taxable value of all homes by the same dollar amount of $40,000. This means that whether your home is worth $1 million or $250,000, the reduction in taxable value is the same — $40,000. In most school districts, this exemption reduces the school property taxes that homeowners pay by roughly $400 a year, compared to $250 a year for the prior exemption.

But when cities, counties, community colleges, and hospital districts grant a homestead exemption, they can’t use the flat-dollar method. Their only option is to reduce a home’s value by up to 20%.

A flat-dollar exemption gives a bigger boost to middle-class homeowners. A $400 tax break, for example, is a larger share of a middle-class homeowner’s income than that same $400 would be for an upper-class homeowner. In contrast, a percentage exemption is of greatest value to those with the most expensive homes. According to the Comptroller’s “Tax Exemptions & Tax Incidence” study, more than half of the benefit of the optional percentage exemption goes to the top 20% of Texas families (those with incomes over $156,700), while just over one-quarter of the benefits of a flat-dollar exemption go to the same income group.

Bills to permit local taxing units to grant a flat-dollar exemption, HB 1858/HJR 91 by Rep. Rodriguez, HB 3260/HJR 129 by Rep. Thierry, and SB 887/SJR 42 by Sen. Eckhardt, were filed in the 2021 regular legislative session but did not receive committee hearings.

Sales price disclosure

Property taxes are based on the value of each property. To ensure that property owners are paying their fair share of taxes based on accurate valuation of their property, Texas lawmakers must reform our appraisal process to accurately determine new values in the rapidly changing real estate market.

Property tax appraisals are intended to reflect the “market value” of the property — what that property would sell for in a competitive market. In most states, the appraisal process is based on “sales price disclosure,” a requirement that the price at which any property changes hands is publicly reported. This information is the best basis for determining the true market value of a property. Then, based on this information, the current value of similar properties can be determined with appropriate adjustments for differences in age, condition, location, and other factors.

Unlike most other states, Texas is one of a dozen that does not require buyers or sellers to report sales price information to local authorities. Therefore, Texas appraisal districts lack the most complete and accurate basis for determining property values. This is like making a store clerk guess the correct sales tax on an item while you cover up the bar code and hide the price.

The result is that difficult-to-assess commercial properties and high-end homes tend to be undervalued. Owners of these properties therefore pay less than what they should in taxes that support public services, which then shifts the financial burden onto lower-income homeowners. Requiring reporting of all real estate transactions will be essential in correcting this imbalance and recognizing the changed values of property.

During the 2021 regular legislative session, a bill to institute disclosure, HB 1101 by Rep. Beckley, received a public hearing but was not voted out of committee despite receiving support from the Texas Association of School Boards, the Conference of Urban Counties, and several individual cities and counties.

In the first special session, HB 105 by Rep. Bernal would have required the state comptroller to report on the feasibility of requiring sales price disclosure, but it was not even referred to a committee for a possible hearing.

“Equal and Uniform” appeals

Property owners have the right to protest the tax appraisal of their property if they believe the appraisal district has set the appraisal above market value, or if they believe their appraisal is not equal to a similar property.

The most common approach to an equity appeal is to compare the appraisal being protested to other appraised values. Property owners can argue that their appraisal is greater than “the median appraised value of a reasonable number of comparable properties appropriately adjusted” (Tax Code, sections 41.43(b)(3) and 42.25(a)(3)). Property owners do not have to allege that their tax appraisal is greater than the market value of a property, just that its appraisal is higher than the appraisal of certain other properties. Appeals on this basis are called “equal and uniform” appeals.

The key characteristic of equal and uniform appeals is that the appraised values of comparable properties may have been lowered during prior protests. This creates an incentive for owners to file protests as close to the deadline as possible, so that other properties are adjusted and their values are lowered before owners’ protests are heard. This lowers the median value against which their property’s appraisal is compared and creates a race to the bottom as successive protests push down the median value. It also creates an administrative burden on appraisal districts.

Another problem is that what counts as a “comparable property” is not defined. Property owners can compare their property to a property in another county, for which the appraisal district is not responsible and does not have information. Other less common equity-related appeals are based on comparisons to appraisals within the same appraisal district.

An additional advantage for large property owners is the requirement that an appraisal district that loses a lawsuit must pay the property owner’s attorney fees, up to $100,000 per property per year (suits often involve related parcels over more than one tax year). But this responsibility is not reciprocal — a losing property owner does not owe attorney fees to the appraisal district.

This disparity creates an obvious incentive to sue, particularly for owners of large properties, when the potential tax savings are greater than the potential cost of losing. Appraisal districts have a strong incentive to settle cases for lower appraisals than they might be able to defend in court, to avoid the risk of being ordered to pay the property owner’s attorney fees. The Legislature should apply the same requirement to both sides of a suit so that each would bear similar risks in litigation.

Two bills to reform equal and uniform appeals were filed during the 2021 regular session — HB 1099 by Rep. Beckley and SB 134 by Sen. Johnson — but neither received a committee hearing.

Property tax cuts in the 2021 special sessions

In his priority lists for 2021’s special sessions, Gov. Abbott included the topic of “property tax relief.” In response, the Legislature proposed the aforementioned constitutional amendment to raise the school homestead exemption from $25,000 to $40,000, approved by voters in May. 

At the time the proposed change was heard by the Legislature, the Legislative Budget Board estimated that the increased exemption would cost the state $439 million in fiscal 2023, and $983 million in the 2024-25 budget, to replace school property tax revenue lost due to the increase via the school finance system. The vote in support on the May 2022 ballot was 85% to 15%.

Another proposed constitutional amendment and a bill approved by the Legislature will tweak minor aspects of the property tax system. But none of these changes make the fundamental reforms needed to improve the fairness and accuracy of Texas’ local property tax system.

Reduction in school taxes for seniors and Texans with a disability

The school property tax bill for homeowners who are at least 65 years old or who are disabled is capped (“frozen”) at the amount owed in the year they qualify. Because of this “freeze,” these homeowners did not see a decrease in their tax bills when school districts started to reduce their tax rates as required by 2019’s House Bill 3. The Legislature proposed a constitutional amendment in the second called session to reduce the capped amount by the same proportion as the reduction in a school district’s tax rate, starting in the 2023 tax year. School districts will receive additional state aid to reimburse them for any tax revenue loss. 

The fiscal note estimated that this change would cost the state $467.5 million in the 2024-2025 budget, to replace property tax revenue lost by school districts. Voters approved the proposed constitutional amendment to permit this change in May 2022 by a margin of 87% to 13%.

Property tax reduction for home buyers

Texan homeowners receive homestead exemptions from cities, counties, schools, and special districts that reduce the taxable value of their homes. For instance, all homesteads currently receive a $40,000 exemption from school property taxes. Under prior law, a homestead exemption took effect on January 1 of the year after the homeowner purchased the home. During the second special session, the Legislature passed a bill to allow a homeowner to benefit from homestead exemptions whenever they qualify, with the benefit prorated in the first year. The fiscal note did not estimate the cost to the state of covering the slight reduction in property taxes collected by school districts. According to testimony at the public hearing on this proposal, the effect on other local taxing units is expected to be minimal. The supplemental appropriations bill set aside $50 million annually to cover the potential cost to the state of this change in 2022-2023.

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