Part II of TCCRI's recently published State Budget & Taxation Task Force Report discussed in part how best to provide property tax relief to Texans. What follows is an excerpt from the Report on that topic.
[Recent] studies indicate that Texas’ property tax rates remain quite high relative to other states, even as SB 2 and HB 3 restrain increases in property taxes. The Tax Foundation rates Texas as having the sixth-highest property taxes for owner-occupied housing.[i] A recent analysis by Attom Data Solutions found that Texas was tied for the ninth-highest effective property tax rates on single family houses in 2021,[ii] and a third analysis found that Texas had the seventh-highest property taxes for homeowners.[iii] Rather than waiting years for the limits on HB 3 and SB 2 to move Texas towards a better ranking relative to other states, the Legislature should devote a substantial portion of the state’s surplus revenue to lowering property taxes across the board.
In his January 2023 Biennial Revenue Estimate for the 2024-25 biennium, the Comptroller projected that the state will end the 2022-23 biennium with a $32.69 billion surplus (after taking into account certain constitutionally-required transfers), although he emphasized that, as always, economic projections are imprecise.[iv] With the largest budget surplus in the state’s history, the Legislature should make property tax relief its chief priority in the 88th Session. At a minimum, for every dollar of increased state spending in the 2024-25 biennium, at least one dollar should be directed to property tax relief. Of course, under this formulation, state appropriations effectively used to fund property tax cuts would not be viewed as increased state spending, but rather as spending for tax relief.
The best way to provide Texans with property tax relief is for the state to use its surplus revenue to “buy down” school district M&O taxes, a process which is already in place due to a bill from the 86th Session. Through this process, the state compression percentage is lowered, thereby lowering the minimum and maximum property tax rates school districts can impose, with the state holding harmless school districts for the forgone local tax revenue. Under current law, the maximum and minimum rates a school district can impose vary from district to district depending on the property value in the district, although there is an absolute cap and an absolute floor that applies to all districts. For the 2022 tax year, no district may impose a Tier 1 tax rate greater than $0.8941 per $100 of taxable property value, or a rate lower than $0.8046 per $100 of taxable property value.[v]
The state has a history of buying down school M&O taxes. In response to a Texas supreme court decision, the Legislature modified the school finance system in House Bill 1 (79S3, 2006), which, among other things, slashed the maximum M&O tax rate which school districts could impose and provided state funding to “hold harmless” school districts for the lost revenue. In 2019, House Bill 3 (87R; Huberty, et al.) overhauled the school finance system, again compressing local tax rates and using state funds to increase funding for school districts. Over time, the automatic compression mechanism in HB 3 will use state revenue to reduce school district M&O tax rates.
These past measures demonstrate that the state can fulfill its constitutional duty to offer a quality education to all children in Texas, while at the same time providing property tax relief. School district M&O taxes are an attractive target to cut because they are generally the single largest component of a taxpayer’s property tax bill; in the 2019 tax year, school district taxes (both M&O and I&S) comprised $36.25 billion of the $67.29 billion in property taxes statewide: 53.9 percent.[vi] The vast majority of that $36.25 billion was from M&O tax revenue. In fiscal year 2019, school district M&O revenue (including recapture) totaled $27.3 billion.[vii]
But there are other good reasons for providing property tax relief through a buy down of school district M&O rates. First, as a type of property tax, school district M&O taxes have all of the flaws of this category of taxes, which are discussed [elsewhere in the Task Force Report]. Second, this approach has virtually no administrative costs. The collection of property taxes of course has administrative and compliance costs, but simply making rates lower does not increase those costs. Third, buying down school district M&O rates delivers broad tax relief. Whereas a homestead exemption benefits only homeowners, buying down rates benefits people who own non-homestead homes and businesses. In addition, lowering school district M&O tax rates lowers costs for landlords, which in a competitive market enables them to pass on at least a portion of the savings to renters in the form of lower rent.
Policy Recommendation: Use the Surplus to Provide Tax Relief.
Dedicate at least $16.3 billion (half of the 2022-23 budget surplus) to property tax relief through buying down school district M&O taxes, irrespective of whether doing so requires the Legislature to vote to exceed the spending limit.
Policy Recommendation: Use the unspent $3 billion in ARPA funds for property tax relief.
[Furthermore,] the state still has $3 billion in unspent COVID-19-related federal aid from the American Rescue Plan Act (ARPA)…It should be dedicated to property tax relief.
You can read this and the rest of the report here.
In January 2023, the LBB provided an update on the state’s APRA funds, indicating that the unspent amount was actually $5.4 billion.[viii] This increase from $3 billion was due to several fiscal events detailed by the LBB in its Summary of Legislative Budget Estimates (House) for the 2024-2025 Biennium.
Fortunately, the drafts for both the Senate and House budgets for the 2024-2025 biennium (Senate Bill 1 by Huffman and House Bill 1 by Bonnen, respectively) set aside significant funding- $15 billion- for property tax relief.[ix]
-------------------------------------------------------------------------------- [i] “Taxes in Texas,” Tax Foundation, https://taxfoundation.org/state/texas (last visited January 17, 2023). [ii] Attom Data, “Property Taxes on Single-Family Homes Rise Across U.S. in 2021, to $328 Billion,” (April 14, 2022), https://www.attomdata.com/news/market-trends/home-sales-prices/attom-2021-property-tax-analysis/ [iii] John S. Kiernan, “Property Taxes by State,” (March 2, 2022), https://wallethub.com/edu/states-with-the-highest-and-lowest-property-taxes/11585. [iv] Comptroller, 2024-25 Biennial Revenue Estimate (January 2023), https://comptroller.texas.gov/transparency/reports/certification-revenue-estimate/2022-23-update/ [v] Texas Education Agency, “2022 Maximum Compressed Rates,” https://tea.texas.gov/about-tea/news-and-multimedia/correspondence/taa-letters/2022-maximum-compressed-tax-rates (last visited January 17, 2023). [vi] Legislative Budget board, 2022-23 Fiscal Size-Up, (March 2022), https://www.lbb.texas.gov/Documents/Publications/Fiscal_SizeUp/Fiscal_SizeUp_2022-23.pdf (Figure 41). [vii] Id., Figure 158. [viii]https://www.lbb.texas.gov/Documents/Appropriations_Bills/88/LBB_Recommended_House/7712_S02_House_Bill_Summary.pdf (p. 16). [ix]https://www.texastribune.org/2023/01/18/texas-legislature-budget/