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State Budget & Taxation: Rollback Rate Reform

Part II of TCCRI's recently published State Budget & Taxation Task Force Report discussed the current statutory caps on the annual rate of growth in property taxes, and suggested steps to strengthen them. What follows is an excerpt from the Report on that topic.

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The 86th Legislature’s signature accomplishments were overhauling the state’s school finance system and implementing property tax reform that will cap the growth in local property taxes unless local voters authorize otherwise. These accomplishments, enacted through House Bill 3 and Senate Bill 2, were a much-needed response to the explosive growth of property taxes in Texas over the last two decades. In general, House Bill 3 caps the year-over-year growth of a school district’s M&O property tax revenue (excluding new property in the district) at 2.5 percent unless a local election is held and voters approve a greater increase. For most taxing units other than school districts (e.g., cities and counties), a similar cap of 3.5 percent on increases in M&O tax revenue applies, again subject to voters approving a greater increase in an election.[1]


It is difficult to overstate the importance of these two bills. While Texas is overall a low-tax state, its property taxes are among the highest in the country and have imposed a heavy burden on families across the state for too long. Prior to these bills being enacted in law, a survey by Attom Data Solutions found that Texas had the nation’s third-highest effective property tax rate in 2018.[i] While the bills will restrain future growth in property taxes, their effects on existing property taxes are relatively modest; owners of $250,000 homes on average were projected to save an estimated $200 in 2019 and an estimated $325 in 2021.[ii]


More 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.[iii] 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,[iv] and a third analysis found that Texas had the seventh-highest property taxes for homeowners.[v] 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.

The Legislature should continue to expand on the foundation laid by SB 2 and HB 3 by asking the fundamental question: why should voter approval of any year-over-year increase in M&O tax revenue not be required? Currently, growth in year-over-year M&O revenue (excluding revenue from new property) is capped at 2.5 percent or 3.5 percent, although some smaller taxing units and community college districts have an 8 percent cap. In addition, the 2.5 and 3.5 percent caps are temporarily eased in the case of disasters. A strong argument can be made that any annual increase in M&O revenue (except for that attributable to new or improved property) should require voter approval. The requirement of voter approval is already present to a large extent with interest and sinking (I&S) taxes that fund capital improvement projects because voters must approve the issuance of new bonds.


Allowing local governments to increase taxes every year without an election could lead to the presumed default that M&O revenue “should” increase to the capped amount every year. This presumption is counter to the idea that government should constantly be examining its expenditures and seeing how it can reduce taxes as technology progresses and society becomes wealthier. Proponents of allowing local governments to raise increased revenue without an election will point to inflation and how it erodes the value of money over time. This erosion, their argument goes, justifies small increases in annual revenue to keep spending in real dollars constant. This argument should be countered by two considerations.


First, notwithstanding the spike in inflation in 2021 and 2022, inflation in the coming years is likely to be low. According to the Federal Reserve Bank of St. Louis, and expected average annual inflation over the next 30 years as predicted by the financial markets was just 2.26 percent as of December 2022.[vi]


Second, property tax caps do not apply to newly constructed properties or to new improvements to existing property. Given the rate at which Texas is growing, these exceptions to the cap will generate significant revenue for local governments.


Third, and most importantly, Texas voters have shown a consistent willingness to approve the issuance of debt when local governments can provide a good reason for that issuance. As touched upon above in this Task Force Report’s discussion of local spending, “in the November 2022 elections, 106 local governments in Texas held 212 bond elections, with 139 of these being carried, approving new debt totaling $19.3 billion (a 65.6 percent passage rate).”Because revenue for current operations is even more critical to local governments’ functioning than long-term projects financed by debt, one would expect the voter approval rate for M&O revenue increases to be even higher than that for bond issuance. This consideration should ease concerns that the budgets of local governments will be reduced over time through inflation.

If implementing the above suggestion proves to not be feasible, the Legislature could consider less sweeping but still substantial reforms. An obvious reform would be to move towards a standardized property tax cap of 2.5 percent. There is little reason for counties and cities to be subject to a 3.5 percent, while schools are subject to a 2.5 percent cap. Additionally, as discussed in TCCRI’s Education & Workforce Task Force Report, community college districts are currently subject to an 8 percent cap. Given their underwhelming track record over the last decade (discussed in detail in that Task Force Report), community college districts should either be subject to a 2.5 percent cap, or to a cap based on an inflation-adjusted cost per enrolled student. In any case, local voters should retain the ability to approve proposed tax rates that exceed caps.


Policy Recommendation: Require any rate in excess of the no-new-revenue rate to be approved by local voters in an election


Policy Recommendation: Alternatively, equalize the caps on local taxing units’ year-over-year tax revenue growth at 2.5 percent (unless the special taxing unit exception applies)


Policy Recommendation: Require voter approval for any proposed tax rate by a community college district that would increase inflation-adjusted, per-student expenditures.


Policy Recommendation: Alternatively, lower the current 8 percent cap on year-over-year growth in property tax revenue applicable to community college districts to 2.5 percent.


You can read this and the rest of the report here.



------------------------------------------------------------------------------ [1] A small number of taxing units, referred to as special taxing units (STUs), are subject to higher caps than those set forth in HB 3 and SB 2. Because of their relatively minor importance, this Task Force Report does not discuss STUs.

[i] Attom Data, “U.S. Property Taxes Levied on Single Family Homes in 2018 Increased 4 Percent to More Than $304 Billion,” (April 2, 2019), https://www.attomdata.com/news/market-trends/attom-data-solutions-2018-property-tax-analysis/ [ii] Shannon Najmabadi, “Here's What We Know about the Legislature's Final Property Tax Reform Bill,” Texas Tribune (May 24, 2019), https://www.texastribune.org/2019/05/24/property-tax-reform-texas-legislature/#:~:text=For%20the%20owner%20of%20a,2020%20and%20%24325%20in%202021.&text=The%20final%20version%20of%20the,around%20the%20reduced%20election%20trigger. [iii] “Taxes in Texas,” Tax Foundation, https://taxfoundation.org/state/texas (last visited January 17, 2023). [iv] 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/ [v] John S. Kiernan, “Property Taxes by State,” (March 2, 2022), https://wallethub.com/edu/states-with-the-highest-and-lowest-property-taxes/11585. [vi] Federal Reserve Bank of St. Louis, “30-Year Breakeven Inflation,” https://fred.stlouisfed.org/series/T30YIEM (December 2022 data is as of January 17, 2023).

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