What the Legislature Has Failed To Do in 2023
Make investments in the future for all Texans. In particular, the basic allotment (the building block for school finance formulas) remains unchanged from its 2019 level, completely ignoring how inflation affects the cost of providing adequate education for children in every part of the state.
What They Did Instead
In the second special session, which ended July 13, the Texas Legislature devoted $13.3 billion of the expected, one-time $32.7 billion cash balance (“surplus”) to reducing taxes. Combined with the $5.3 billion already appropriated in the state budget for school tax replacement, due to existing finance formulas, legislators bragged they had cut taxes by $18.6 billion – allegedly the “largest tax cut in state history.”
When the Legislature last passed a major property tax cut in 2006, it made efforts to generate new state revenue to replace the lost school property taxes. The franchise tax was reformed to become what is now the “margins tax,” and the cigarette tax was raised from 41 cents per pack to $1.41. The increased revenue was set aside in a new Property Tax Relief Fund, dedicated to funding cuts in school property taxes. This year, the Legislature made no provision to generate new state revenue to help replace lower school property tax revenue.
“Compression:” Force Down School Property Tax Rates
Under the school finance formulas adopted in 2019 (HB 3), school districts must reduce tax rates as their property values grow. SB 2 accelerates this process, requiring districts to reduce their tier one M&O tax rates (the money needed to run schools, pay teacher salaries, cover the cost of utilities, and provide a base level of education) with the state increasing its spending to replace these lost taxes. This is a revenue-neutral swap that leaves local school revenue unchanged. HB 2 requires districts to cut their M&O tax rate by 10.7 cents below what the formulas would otherwise require. These rates currently run from roughly 80 cents to 90 cents, with most districts at the lower rate.
Although House Rules permit preparation of a tax equity note showing the effect of this cut on families at different income levels, no note was requested. Instead, we can estimate the effect from the calculations of the incidence of the current school property tax in the Comptroller’s Tax Exemptions & Tax Incidence report. An across-the-board rate cut benefits businesses, which pay just over half of school property taxes. But considering the final incidence of property taxes on Texas families – including actions by businesses to adjust to a rate cut by increasing profits, cutting prices, or increasing wages – the benefits would be significantly tilted toward higher-income families than lower-income families.
Increase the Tax Exemption for Homesteads
If you own a home in Texas, you pay property taxes — but not on the full value of your home. Appraisal districts estimate the market value of all homes, usually on a yearly basis – This is each home’s appraised value. The appraisal district then makes any applicable reductions for which that taxpayer qualifies, resulting in the taxable value. One type of reduction in the value subject to taxation is called a homestead exemption. The tax rate set by each local taxing authority — a school district, city, county, community college, hospital district, or other special district — is then applied against the taxable value to determine the property taxes owed.
School districts are currently required to give all homeowners a $40,000 exemption. This reduces the taxable value of all homes by the same dollar amount — $40,000, regardless of whether you live in a $150,000 or $900,000 home. In most school districts, this exemption has reduced the school property taxes homeowners pay by about $400 a year per household.
SB 2 increases the homestead exemption to $100,000, subject to voter approval in November. We can tell from estimates of the current exemption that the benefit of the homestead exemption is spread fairly evenly among all Texas households, with a greater share going to income groups that are more likely to be homeowners.
Enact a Temporary Appraisal Cap on Non-Homestead Residential and Commercial Property
Under current law, the taxable value of a homestead cannot increase by more than 10% a year, even if its market (appraised) value has increased by more. HB 2 would extend a similar cap to non-homestead residential property (rent homes, second homes, apartments) and commercial property. The cap would only apply to property valued under $5 million (adjusted annually to reflect inflation) and would only be effective for three years.
This cap is erroneously referred to as a “circuit breaker.” A true circuit breaker links tax liability to the taxpayer’s ability to pay, reducing a property tax bill that exceeds a certain percentage of income. Policymakers can target circuit breakers to people who have the most difficulty paying property taxes and reduce their tax liability to a manageable level. Because of this careful focus, circuit breaker programs cost far less than across-the-board rate reductions or increases in exemptions.
Most states (29 and the District of Columbia) offer some kind of circuit breaker, while another 16 offer some other form of an income-limited property tax cut that falls short of being a true circuit breaker. Texas is one of five states that does not offer any kind of income-targeted property tax break.
More than two-thirds of states with circuit breakers extend their programs to at least some renters. It is widely understood that owners of rental real estate pass through at least some of their property tax liability to renters through higher rents. However, there is no guarantee that this operates in reverse, with property tax rate cuts flowing through to renters in lower rents.
Exempt More Small Businesses from the Franchise Tax
The franchise tax is the state’s basic business tax (a firm’s gross receipts minus certain expenses.) Under current law, businesses with less than $1.23 million in revenue do not owe any franchise tax.
SB 3 would double this no-tax threshold to $2.47 million, reducing state revenue by $300 million a year. This revenue would have gone to the Property Tax Relief Fund, which funds the Foundation School Program, so it must be made up with an equal amount from the General Revenue Fund.
Create New Elected Positions on Appraisal District Boards
Appraisal districts in each county set the appraised value of property, from which property taxes are calculated. Most districts are governed by a five-member board of directors, appointed by the governmental units in the county that levy property taxes (the county, the cities, the school districts, and special districts like community colleges). The board is responsible for hiring the chief appraiser and setting the district’s budget. Board members are prohibited from communicating with the chief appraiser about the valuation of property (Tax Code sec 6.15(a)).
SB 2 would create three new board positions in counties with populations over 75,000. These board members would be elected in countywide elections for a four-year term.
The problem is that candidates running for election are likely to promise lower property tax appraisals, even though board members clearly have no role in setting valuations. This could lead to disruptions in the proper functioning of appraisal districts, tumultuous board meetings, and dissatisfaction among voters hoping for lower appraisals.
Voter Approval Required for Most Provisions of SB 2
HJR 2 will put a proposed constitutional amendment on the November ballot. Approval by the voters is required to authorize most of the provisions of SB 1. The amendment would increase the school tax homestead exemption to $100,000, permit the Legislature to enact the 20% appraisal cap, and allow the creation of new elected positions on appraisal district boards.
In addition, the amendment would excuse appropriations made to pay for property tax cuts from the constitutional limit on spending. This limit (Art 8, sec 22) caps the growth in spending of tax revenue not constitutionally dedicated to a particular purpose to the estimated rate of growth in personal income. This limit can be overridden by a simple majority vote of each chamber (“busting the cap”), which is thought to be politically risky. Instead, HJR 2 would simply redefine the cap to exclude spending for property tax cuts.