Texans face an affordability crisis with inflated bills, diminishing savings, and a looming U.S. recession. While this is mostly the result of Washington’s irresponsible policies, Texas governments can help by using massive surpluses to dramatically reduce the sixth most burdensome property tax system in the nation without harming the delivery of core services. The Foundation’s Lower Taxes, Better Texas plan accomplishes this by lowering maintenance and operations (M&O) property tax bills while adequately funding core services.
Published at TPPF with James Quintero.
High property taxes are not just an urban and suburban problem. In rural Hays County (San Marcos and surrounding), for example, property appraisals are shooting up.
“The overall market value of Hays County’s 2022 preliminary appraisal roll rose to nearly $59 billion, up 53.27% from $38.4 billion in 2021,” the Hays Free Press reports. “Commercial and industrial real property increased in value nearly 41%, up from nearly $3.6 billion in 2021 to $5 billion this year.”
One year. And that burden will have to be shouldered by rural Texans who tend to be older and have less income than their urban counterparts.
Yet opponents of property tax reform will use rural Texans as a prop in their argument. But rural Texans need property tax relief, too. And our plan, which will use state surplus funds to buy down the maintenance and operations (M&O) portion of school taxes (the biggest part of your tax bill), will benefit all property owners in every part of the state. The Foundation’s Lower Taxes, Better Texas plan provides a practical way to achieve this goal while funding critical government provisions.
Some have expressed concern that rural counties won’t be able to pay for their first responders—police and firefighters.
But the fact is, our plan is revenue-neutral and would continue to fund critical government services. It would allow for budgets to grow, but would limit increases in spending to no more than the rate of population growth plus inflation—anything more than that is just growing government. Yet within that framework, both schools and local governments would be fully funded. In fact, if cities, counties and special districts use the same formula (population growth plus inflation) to keep their spending in check, they can use surplus revenues to buy down their own property tax rates.
Sales taxes are also a key part of our longer-term plan.
Some have worried that rural Texas, with its more limited sales tax base, would suffer under our plan to broaden the sales tax to completely eliminate school district M&O property taxes within 10 years. But that’s not the case.
Local governments (i.e. cities, counties, and special purpose districts) would have the option to raise their sales tax rate along with the increased funding from the broader base to eliminate their own M&O property taxes. If they don’t do this because they don’t have a sufficiently large sales tax base, then they have the flexibility to not eliminate their M&O property taxes but rather buy them down over time.
There are also concerns that if the economy takes a hit, the state’s general revenues will decline, forcing higher school district M&O property tax rates in response. But our plan would have the state lower school district M&O property taxes only if there is a sufficient general revenue surplus while making permanent past reductions.
There looks to be at least a $12 billion available in general revenue surplus at the end of the current budget period for this property tax relief. If there is a major recession, then the state could call on state agencies to find savings to soften the blow. That has been done before. And the state could turn to the at least $12 billion in the state’s rainy day fund created to cover unforeseen revenue shortfalls. And school districts are sitting on about $20 billion in excess reserves. That could also help them get through a tough recession.
Property taxes are a major problem for rural Texans, whose budgets are already hurting from high gasoline prices (they drive longer distances), high food prices, and general inflation. Don’t use rural Texans to argue against the relief they need.
Texans are facing a crisis when it comes to paying for their skyrocketing property taxes, inflated bills, and saving for a rainy day. In fact, many Texans are living with the fear that exorbitant taxes could take their home away or keep them from buying their first home. The Foundation has developed a balanced, practical solution to lower property taxes by eliminating the maintenance and operations (M&O) property taxes while also funding the needs for critical services.
Invited Testimony Before the Texas Senate Finance Committee
Texans are facing a crisis when it comes to paying for their skyrocketing property taxes, inflated bills, and saving for a rainy day. In fact, many Texans are living with the fear that exorbitant taxes could take their home away or keep them from buying their first home. The Foundation has developed a balanced, practical solution to lower property taxes by eliminating the maintenance and operations (M&O) property taxes while also funding the needs for critical services.
Invited Testimony Before the Texas House Ways & Means Committee
Texas is a leader in the economic recovery from the severe spring 2020 shutdown recession. Texans have overcome many challenges especially since the state was fully opened in March 2021, without statewide mask, closure, or vaccine mandates since then—as these should be voluntary. The 87th Texas Legislature supported the recovery with the passage of many pro-growth policies like the nation’s strongest state spending limit, but there were missed opportunities like permanent, broad-based property tax relief. Given other states are drastically cutting or eliminating taxes, Texas must make bold reforms so it can remain an economic leader, support more opportunities to prosper, and withstand bad policies from D.C.
We should be able keep what we purchase outright. But that’s not the case with real estate in Texas. Even if a mortgage is paid, many homeowners struggle to afford their yearly local property tax bill. This forces too many Texans to lose their homes. And renters who pay more because of skyrocketing property taxes too often can’t pay their rent.
In the March 1 primary election, 76% of Republican voters supported eliminating property taxes in 10 years—without implementing a state income tax. The Foundation has a plan to achieve this worthy goal.
Some suggest property taxes are a necessary evil because the state (rightfully) prohibits an income tax. But this claim isn’t true for other states. Florida and Tennessee don’t have a state income tax, yet they have a much lower property tax burden.
So we should ask, what are these taxes funding?
Most property taxes (80%) are collected from taxpayers for the maintenance and operations (M&O) of a local government’s day-to-day expenses. Of these M&O taxes, the school district portion is the largest. The other portion of your property tax bill goes to the interest and sinking (I&S) fund, which pays down local debt. Collectively, local governments siphon about $70 billion (and rising) from Texans every year.
That elevated burden is also growing too fast.
In the last 20 years, property taxes have grown by 181%, far exceeding the average taxpayer’s ability to pay for these taxes—as measured by population growth and inflation. This measure has grown by only about 100% over the same period.
And this excessive burden isn’t met with efficient spending.
Unfortunately, some taxpayer dollars are lost to waste, fraud, and abuse by governments. These happen from paying too much to fix a road to building Taj Mahal-like facilities to giving public sector executives massive severance payments.
Nearly half of property taxes paid go to support government schools, which haven’t always been good stewards of that money. The latest total expenditures available for the 2019-20 school year for 5.5 million students was about $14,000 per student. That’s close to the national average ($15,342), but shocking when we realize that only 40% of Texas students are reading and doing math on grade level, and 95% of kids who fall behind don’t catch up
By comparison, private schools in Texas cost parents about $10,000 per student, which is in addition to the property taxes paid to a government school their kids don’t go to.
How are private schools doing better, for less money? Basically, government schools aren’t spending money efficiently. Misspending is often rampant, revealing itself in expensive management posts and perks, redundant administrative positions, and other frills.
But even if local governments spent property tax dollars efficiently, property taxes hurt lower- and fixed-income Texans by forcing people out of their homes through no fault of their own. Individual liberty should allow people to own what they purchase instead of renting from the government.
The Foundation has a plan to eliminate M&O property taxes by 2033.
In 2021, we helped put into law the state’s spending growth limit—now, the strongest in the nation—of general revenue to grow less than population growth and inflation. As a result, this limitation should lead to recurring surpluses that ought to be returned to taxpayers. This spending limitation should be expanded to local governments, too.
The Texas Legislature should return at least 90% of the general revenue surplus back to taxpayers by lowering school district M&O property tax rates, which the state already has much control over with the Robin Hood redistribution scheme. Doing this each session could take at most 30 years, depending on the fiscal restraint lawmakers show.
Given this delay, we suggest that after about 10 years (if not before) of this buy down, the elimination process should be sped up and done immediately by broadening the sales tax base without raising the overall tax rate.
To help eliminate the rest of M&O property taxes, local governments should follow the state’s lead by using surplus revenue to lower their M&O property taxes. Then when the state broadens the sales tax base, they could eliminate their M&O completely.
By limiting spending and cutting property taxes, Texas could eliminate 80% of its property taxes by 2033. This would also provide time for lawmakers to determine what to do with the other 20% in I&S, which is already approved by local voters.
Our approach would provide a fairer tax system and a more robust economy in Texas. A happy side effect of this could be even more people and businesses moving to Texas along with more economic growth, further easing the tax burden for all, and helping Texas families flourish for generations.
Texans will never have the peace of mind of owning their home until property taxes have been eliminated. Until then, Texans are renting from the government, always living with the fear that exorbitant taxes could take their home away. The Foundation has developed a balanced solution to give Texans the relief they demand while also funding the needs for critical services like public safety and education. Our Lower Taxes, Better Texas plan will eliminate a significant portion of Texans’ property taxes by 2033 and make structural reforms that limit local government over-spending to prevent annual spikes in tax bills.
It’s playoff baseball time here in Texas—go ‘Stros! But baseball fans know everything depends on the umpires—as the great Bill Klem said, when asked whether a ball was fair or foul, “It ain’t nothing until I call it.”
It’s time for us to call fair and foul on the Texas Legislature; there were some homeruns, some wild pitches and even some unforced errors. And ultimately, it’s the taxpayers who either win or lose.
To begin with, lawmakers did well in remembering the taxpayer by maintaining a Conservative Texas Budget (CTB), which sets a maximum appropriations threshold based on the average taxpayer’s ability to pay for it (as measured by population growth plus inflation), and passing a stronger spending limit.
There was concern with Congress sending Texas $16.3 billion in mostly discretionary funding through the American Rescue Plan (ARPA). During the recently ended third special session, the Legislature appropriated $13.3 billion of it, with a positive of leaving $3 billion for possible tax relief later.
Another winning play is that the Legislature followed most of the Foundation’s recommendations for ARPA funds.
It sustained the CTB and used the funds for only one-time expenditures which will help avoid any fiscal cliffs like some claimed Texas had after Obama’s one-time “stimulus” funds in 2009. Legislators appropriately used $7.2 billion—about half of ARPA funds—for debt payment and replenishment of the state’s depleted unemployment trust fund after the shutdown recession to avoid a massive payroll tax hike on employers. And they ensured transparency and accountability by requiring that the uses of these funds be posted on a government website and put in a separate account, respectively.
While those actions benefited taxpayers, a botched play was in not providing substantial, broad-based property tax relief.
This could have been done, as there were surplus funds of $6 billion in general revenue and $3 billion in ARPA funds. All legislators needed to do was use surplus funds to reduce school district maintenance and operations property taxes, thereby continuing the path toward eliminating property taxes by 2033.
Instead, lawmakers raised the homestead exemption for school district property taxes by $15,000 to $40,000, funded by about $450 million in general revenue annually. And even this won’t happen unless voters approve this constitutional amendment in May 2022. If passed, more than 5 million homeowners would benefit from average savings of $176—excluding other higher local property taxes. So, no relief for business owners, landlords, apartment owners, renters, and those with secondary properties.
This compromise followed proposals in the Senate that would have provided at least $2 billion in general revenue to lower school district property taxes for everyone and in the House that would have provided $3 billion in ARPA funds for checks to only those with a homestead.
Clearly, the Senate’s version would have been broad-based, even though more could have been added to it. Combining it with HB 90 in the House that would have provided structural reform to eliminate property taxes over time, which died in House calendars, could have provided extraordinary relief. Instead, it appears that lobbyists for the public ed establishment pushed against this pro-taxpayer effort, resulting in little-to-no relief through the increase in the homestead exemption.
A huge unforced error was the wasteful spending of ARPA funds.
The decision to allocate $325 million in ARPA funds to support $3.3 billion in tuition revenue bonds for construction at higher education institutions is at the top of the fouls list. While tuition and student debt continue to rise, the quality of education is declining, and universities are already receiving billions of dollars, this provision is ill-advised.
It’s unfortunate that instead of providing tax relief these funds went to projects like student housing enhancements for the Marine Science Institute at the University of Texas at Austin and $100 million to two state university systems for institutional enhancements.
However, not all state legislators sought to rubber stamp additional funds to a declining higher education system. Rep. Matt Schaefer (R-Tyler) proposed an amendment that sought to connect the amount of money institutions can receive based on the rate of tuition increase. Unfortunately, the amendment didn’t pass, ending an opportunity to curb the fiscal bloat that plagues Texas universities, students, and taxpayers.
Putting this year’s legislative game in perspective there were many hits but also some strikeouts, especially on major property tax relief. But taxpayers did get relief from less government spending than what was available.
The Legislature left about $20 billion in total revenue, including $6 billion in general revenue, and $12 billion in the rainy day fund and $3 billion in ARPA funds on the table. Texas should return much if not all of these surplus funds to struggling taxpayers so they can recover from the shutdown recession, withstand the stagflation by the Biden administration, and actually own their property.
But as with baseball, there’s always next season.
Texas and football go hand-in-hand. There is nothing like the two-minute drill at the end of a game with increased adrenaline pushing you on to victory. Texas lawmakers are likely feeling a similar jolt in an effort to appropriate the remaining $16 billion of the $40 billion that Congress sent to Texas in the American Rescue Plan Act (ARPA) earlier this year.
The Legislature has done a good job so far this year in keeping a responsible budget, but these federal funds could tempt lawmakers to spike the football early—allocating ARPA money that doesn’t help the Texas taxpayer while putting the nation further into debt. In fact, a responsible approach would lead Texas to reject these funds, given the state has a large budget surplus, though there’s likely no political will to do so.
Let’s return to the first quarter of the game.
The Legislature passed the 2022-23 state budget well below TPPF’s Conservative Texas Budget (CTB), which sets a maximum threshold on the budget based on the average taxpayer’s ability to pay for it (as measured by population growth plus inflation). And lawmakers parked $12 billion in the state’s rainy day fund.
This approach maintained the overall strategy that the Legislature has been operating under for the last four budgets. By staying within the CTB maximum threshold, and passing into law a stronger spending limit this year, lawmakers pledged to keep more money in taxpayers’ pocket.
Now the state is in the fourth quarter and is determining how to allocate the ARPA funds, which are your taxpayer dollars. The nearly $16 billion offers plenty of opportunity—both good and bad—for lawmakers to spend hard-earned taxpayer dollars.
The game plans in the Texas Senate with SB 8 and the House with HB 145 are largely the same, with just a $350 million difference. Most items appear to abide by the restrictions on the use of funds outlined by the U.S. Treasury’s interim guidance. So far, so good. But about $500 million is being set aside for university construction in both bills, which doesn’t count as infrastructure (the feds define infrastructure as sewer, water, and broadband). How is this a good use of taxpayer dollars?
In their current plans, both start strong with over $7.2 billion designated to pay the outstanding debt owed to the U.S. Treasury’s Unemployment Trust Fund and to replenish most of what was in the fund pre-shutdown. This is essential because without paying, this there would be a huge spike in employer taxes that support this fund. But we would recommend $7.8 billion for full funding to provide a better cushion.
The next strong play in both plans is to allocate $3.7 billion for public safety and criminal justice. These funds appear to be allocated to swap with general revenue funds already appropriated in the current budget cycle for border security and wall thereby not further growing spending. This could also free funds up later for property tax relief. This allocation provides serious relief to taxpayers as the state has been subsidizing the border crisis for the rest of the country because of the inept leadership on this issue in Washington.
These strong plays follow two-thirds of the Foundation’s winning strategy for ARPA funds. The third one is necessary to get Texas across the goal line—property tax relief.
Burdensome local property taxes continue to climb, forcing some Texans to delay major life decisions like marriage and home ownership. Using the rest of the ARPA funds to add to the at least $2 billion in SB 1 to reduce school district M&O property taxes for the 2022-23 school year would help lower tax bills at a time when many taxpayers are suffering from the effects of the shutdowns. This combination of plays along with HB 90 and other moves could eliminate property taxes by 2033. Three states have already started cutting taxes using ARPA funds so Texas shouldn’t delay.
In addition to using ARPA funds for the plays above to move the down the field, the Legislature should use best practices with these funds for transparency and accountability for taxpayers. Any use of ARPA funds must be for only one-time expenditures, which will help avoid a fiscal cliff like that after Obama’s one-time “stimulus” funds in 2009 dried up. ARPA funds should also be separated from Texas’ base budget. And lawmakers should post the allocation and distribution of funds on a website.
The Legislature is in the final two minutes of the fourth quarter. This is where champions are made. Let’s ensure Texas taxpayers win the day with a responsible game plan, rather than irresponsibly spending ARPA fund.
I don’t know the story behind the clean two-story home on Goldfinch Lane in Montgomery County. But I know enough. Soon, attorneys will sell the property on the fourth floor of the Commissioners Court Building in Conroe. In this white-hot real estate market, it will likely to go investors.
What it means is that at some point, a family couldn’t keep up with the property taxes. And now the foreclosed home, valued at $171,180, will go to the highest bidder in the county’s monthly tax sale. Did it involve an illness? A death? It doesn’t matter now.
This is a threat that hangs over every homeowner in Texas—and every business owner who holds the title to the property they do business on. Texans will never experience the peace of mind that comes with owning their homes until property taxes are eliminated. Until then, Texans are simply renting their homes from the government, always with the fear that taxes could become so exorbitant they can no longer afford to stay.
But we have a plan. Our “Lower Taxes, Better Texas” plan will eliminate property taxes for every Texan by 2033 (or sooner), while also making structural changes to our system that prevent year-to-year spikes in tax bills. At the same time, we’ll rein in irresponsible local government spending.
Texans need and want real property tax reform. In recent polls, 82% of Texans said property taxes are a serious issue and 7 out of 10 said they would be upset if the current legislative session ended with nothing done to lower their property tax bill.
Even the media agrees.
“Older Texans on fixed incomes, even those with senior exemptions and freezes, too often end up being priced out of their homes,” a recent Dallas Morning News editorial noted. “Young first-time homebuyers are priced out of homeownership and stay in apartments where monthly rents are rivaling monthly mortgages.”
How does our Lower Taxes, Better Texas plan work? It’s a three-pronged approach.
It begins with controlling the driving force behind tax hikes—increased spending. The Legislature has already enacted a new spending limit based on a formula using population growth and inflation, and any surplus general revenue must first be used to reduce property taxes. This surplus can be used to buy down school district maintenance and operations (M&O) taxes.
And that’s the second prong: Lawmakers now must pass Senate Bill 1 and House Bill 90, which will ensure that those surpluses are used to buy down property taxes now, and in the future. SB 1 would spend the current surplus on property taxes, and with this precedent, HB 90 would require that future Legislatures allocate at least 90% of any future surplus to the same cause.
Finally, legislators should pass House Bill 91 (with a few key amendments). We must redesign the state’s tax code so that local governments are funded primarily by sales taxes. This redesign would broaden the base of goods and services covered by the sales tax while lowering the rate. The result would be to finally eliminate school M&O taxes after years of cutting them.
Critics say lower-income Texas families would be hurt by reliance on sales taxes, but they fail to consider that we all pay property taxes—even if we’re renters. Higher property taxes get passed along—property owners aren’t in the rental business to lose money. And a slight broadening of the sales tax base will allow us to keep the exemptions—such as food and medicines—that make sense for Texas families.
Besides, once property taxes are eliminated, that surplus can then used to buy down sales taxes.
In September, Texas Gov. Greg Abbott added property tax reform to the third Special Session agenda. Legislators can act now to ensure Texans can keep their homes for generations to come.
I’ll probably never know why that Montgomery County home sits empty. But by itself, it tells a story—one we must work to ensure doesn’t get repeated again and again. Let’s stop taxing Texans out of their homes.
Texans will never experience the peace of mind that comes with owning their home until property taxes are eliminated. Until then, Texans are simply renting their home from the government, always with the fear that taxes could become so exorbitant they can no longer afford to stay. For decades, TPPF has been providing strategies to give Texans the relief they demand while also providing the community with the tax revenue it needs for critical public services like education. Our Lower Taxes, Better Texas plan will eliminate property taxes for every Texan by 2033, while also making structural changes to our system that prevent year-to-year spikes in tax bills and reins in irresponsible local governments.
It happens on the first Tuesday of every month. Bidders gather at the west entrance steps of the Smith County Courthouse, looking for bargains. At 10 a.m., the sales commence—properties are auctioned off to pay the taxes owed on them. Some are vacant lots and some are homes. All were seized from their owners over delinquent property taxes.
This happens throughout Texas, and it’s big business. What it shows is that with property taxes hanging over them, every property owner in Texas is really just a renter. If they fall behind on taxes, they can lose what they worked so hard for.
But Texas lawmakers now have an opportunity to ease the burden on property owners—our plan would cut property taxes nearly in half over time, by eliminating school district maintenance and operations (M&O) taxes. We get there by holding down spending growth and using surplus taxpayer dollars at the state level to buy down those school district M&O property taxes over time.
Under this buydown approach, every tax dollar not spent by the state will produce a property tax cut for Texans. Following our plan would let the Texas Legislature keep its pledge to taxpayers by actually lowering property tax bills—something missing in most other plans.
School district M&O property tax is estimated to collect about $56 billion in 2020-21, making up nearly half of the hefty property tax burden Texans face. Putting this money back into the pockets of Texas families is the right thing to do.
In the regular session of the 87th Legislature, lawmakers passed another Conservative Texas Budget and put most of our formula into law. This stronger spending limit restricts growth of much of the state’s budget to the rate of population-times-inflation (6.38% biennially since 2012), a formula that helps ensure the budget doesn’t grow faster than the average Texan’s ability to pay for it.
Yet because state revenues have grown at a higher rate (9.02% biennially since 2012), we’re looking at a steady surplus in the state’s coffers. That surplus can be used to eliminate school district M&O property taxes over time. How? By increasing the state’s share of education spending, gradually replacing the M&O property tax burden.
School districts will have to do their part; they’ll need to lower their tax rates each year to match increased state funding, as well as keep their spending in check (they’re already limited to growth of no more than 2.5% per year without the okay of taxpayers).
If these revenue and spending growth rates hold, Texas could eliminate school district M&O property taxes in 20 years. What would that mean to Texas families? Their property tax burden would be cut from today’s high of about 2.3% of their home’s value to about 1.3%.
This buydown process could be started now by using most or all the Texas Comptroller’s expected $7.85 billion in surplus for the 2022-23 biennium and by passing a bill such as HB 122 during a special session, as soon as Democrats who left Austin return. To lower Texans’ property tax bills soon, at least $5 billion of the surplus should go to buy down school district M&O property taxes.
Lower-income families would benefit most from our plan, because a higher percentage of their incomes go to pay property taxes (that’s true even if they’re renters). Property taxes are beyond our control, unlike sales taxes. We can control what we buy, but our tax rates and taxable property values are set by others.
Our “Lower Taxes, Better Texas” plan would let Texans keep more of their own hard-earned money—and in many cases, their homes. The American dream of home ownership shouldn’t end on the courthouse steps.
Lower Taxes, Better Texas: The Bold Agenda to Reduce Property Taxes, Protect Taxpayers, and Grow the Economy
The way we levy and raise property taxes is not just unsustainable, it is unethical. Texans are being forced out of their own homes by insatiable local governments looking to squeeze every dime out of taxpayers. Texans literally can’t afford for the Legislature to wait years to address the issue or make small changes to the system. More than 70% of Texans say property taxes are a “major burden for them and their family” and want relief now. It’s time for bold action.
Lower Taxes, Better Texas* is a two-pronged approach that immediately cuts property taxes nearly in half and redesigns our system to protect taxpayers, provide a fairer tax system, and grow our economy. The plan not only gives taxpayers immediate relief, but it also makes structural changes to our system that prevent year-to-year spikes in tax bills, allow for a more equitable and transparent form of taxation, and rein in irresponsible local government officials.
In response to the Texas Comptroller’s announcement that state revenue would be more than $3 billion higher than expected for the 2022-2023 biennium, the Texas Public Policy Foundation’s Vance Ginn released the following statement:
“The Texas Comptroller’s improved estimate of tax collections from primarily an improving COVID-19 situation and opened economy shows that the Legislature has $3.1 billion more available for the Texas budget. Both the House and Senate have already voted in favor of budgets that cover the state’s priorities and stay within the average taxpayer’s ability to pay for them. Therefore, the responsible approach to addressing the additional tax collections should be to give taxpayers relief—especially more toward property tax relief—to help Texas families and businesses.”
Texas Comptroller Glenn Hegar forecast $115.65 billion available for general-purpose spending in 2022-23, which is up $3.12 billion from January.
72% of Texans say property taxes are a major burden
House Bill 1869 is scheduled for floor debate today. The bill would protect last session’s tax reforms by including debt not approved by voters, such as certificates of obligation, in the 3.5% voter-approval tax rate calculation. Under current law, these items are excluded from the tax rate calculation, even though they lead to higher taxes. This loophole gives cities and counties a big incentive to use (and abuse) them.
As you can imagine, the Texas Municipal League has come out strongly against the bill and has even succeeded in softening it somewhat. It may have even mustered the votes to kill it in the House floor.
For further explanation, here’s my colleague James Quintero’s testimony before a House Committee:
Mr. Chairman and Members of the Committee--
Good morning! My name is James Quintero and I’m a policy director at the Texas Public Policy Foundation. I’m here today to testify in support of House Bill 1869.
As we just heard from the bill author, the primary motivation for this legislation is to strengthen the principle of taxation with representation. Its goal is to provide people with the opportunity to participate in the democratic process as their true tax burden rises above a certain level.
The core of this idea is already established in state law, thanks to the passage of last session’s signature property tax reform. HB 1869 would simply expand upon those existing concepts by requiring tax-supported debt obligations not approved at an election to be paid through the M&O portion of the tax rate.
This sort of change is important from a truth-in-taxation standpoint. But it’s also important from the perspective of good governance.
In the decade preceding the reduction in the property tax trigger—which really only took effect this fiscal year—local governments were increasingly indulging in nonvoter approved debt. Consider that from fiscal year 2011 to 2020, CO debt held by cities, counties, and certain special districts grew from $12.87 billion to $15.85 billion.
Much of that debt was owed by a relative few too. As you’ll note on your hand-out, the top 20 issuers accounted for approximately 40% of all CO debt outstanding, with places like Bexar County, Travis County, San Antonio, and Lubbock among the most prolific users.
It’s too early in the fiscal year to say whether this trend will hold or accelerate; however, what I can tell you is that, under current law, local governments have an incentive to lean more heavily on nonvoter approved debt than they did in the past, since those costs are excluded from the 3.5 percent calculation.
Updating the definition of debt for the purposes of truth-in-taxation will eliminate this incentive and, perhaps in some instances, dissuade questionable expenditures in the future.
Despite what you may hear today, CO debt is not always need-based or proper. Here are a few quick examples of their misuse in recent years.
Vance Ginn, PhD, is chief economist at the Texas Public Policy Foundation.
By combining property tax reductions and reform with spending limitations, Texas could shift to a more efficient and fairer sales tax system. In this way, Texans can be assured meaningful, lasting property tax relief and an improved Texas Model that will sustain economic prosperity for generations.
Testimony in Support to Texas House Appropriations Committee
In Texas, we dream big. That’s what House Bill 59 does—it imagines a Texas that lightens the tax burden on Texans, upholds property rights and ensures that education is properly funded.
Authored by Rep. Andrew Murr, R-Junction, the bill would eliminate the school maintenance and operations portion of your property tax bill on Jan. 1, 2024, and would create a legislative commission that would use the intervening time to study the best way to replace that revenue. This bill would cut local property taxes nearly in half while adhering to the state’s constitutional responsibility of funding government schools.
The key to achieving this, of course, is restraining government spending at the state and local government levels.
The fact is that the skyrocketing local property tax burden remains one of the state’s most pressing policy challenges. Property taxes have been growing faster than the average taxpayer’s ability to pay for them. Any growth over population-plus-inflation represents a growth in government above our ability to pay. For more on this formula, which we call the Conservative Texas Budget, click here.
According to the Tax Foundation, Texas has the seventh most burdensome property tax on homeowners. Using a different calculation, Fox News ranks Texas third-worst.
Too many have been forced out of their homes and businesses because of rapidly rising property taxes.
It would be great to eliminate all property taxes, which tend to hurt lower-income earners the most, so Texans can stop effectively renting from the government forever.
A good start in that process would be to eliminate school district M&O property taxes, which account for nearly half of the total property tax burden on Texans. Eliminating just the school district M&O property taxes is rather straightforward because the state determines the funding formulas for the school finance system, and it represents nearly half of the property tax levy across the state.
The question is how to replace this revenue. That’s easy—with a broader-based sales tax.
State sales taxes have grown far less than property taxes, less than personal income, and more closely with population growth plus inflation. This indicates that moving to a system based on the sales tax better aligns with the average taxpayer’s ability to pay for these taxes that fund government spending over time.
There are some important reasons why a sales tax is the better way to fund schools.
First, property taxes are inefficient. Property taxes in Texas are based primarily on subjective valuations by appraisal review boards and tax rates determined by local tax entities with little to no feedback from citizens, creating a highly inefficient collection mechanism.
Next, property taxes are more regressive than sales taxes. Sales taxes are paid once at purchase, yet property taxes are paid annually, hurting low- and fixed-income Texans the most because the costs compound over time. A high property tax also prevents many low-income earners from purchasing their first home and forces many others who do purchase to struggle to keep their home—they may even lose it.
Finally, during recessions (like the recent pandemic), lower-income earners tend to face the highest levels of unemployment and are least able to shoulder a tax burden. Their property tax burden, however, would increase relative to their income, while their sales tax burden would fall more proportionately with their income.
The sales tax is money that comes directly from the choices of consumers. It ensures that all financial power remains within their control, whereas property taxes are a burden that is forced upon all taxpayers with little means of working around it.
It would work—and result in fully funding schools based on the state’s school finance system.
Economists of the Baker Institute at Rice University studied the economic effects of replacing property taxes with sales taxes over time. They found that just a 3.6% decrease in school district M&O property taxes could contribute to a $14.3 billion increase in economic output and 217,000 new jobs after just the first year of reforms and more thereafter. Imagine if we eliminated that burden!
By combining property tax reductions and reform with spending limitations, Texas could shift to a more efficient and fairer sales tax system. In this way, Texans can be assured meaningful, lasting, property tax relief and an improved Texas Model that will sustain economic prosperity for generations.
Free-market capitalism is the best path to prosperity.
The Tax Code should not pick winners and losers but rather fund limited roles for government.
Unfortunately, Chapter 313 property tax abatements do pick winners: Big businesses are favored over small businesses.
Businesses that may not be in operation for the long term receive long-term tax breaks.
Nearly two thirds of Chapter 313 projects are for renewable energy, which would likely locate in Texas anyway given Texas’s geography of open lands, a lot of sun, and wind in specific regions.
A third of those renewable energy projects are for foreign companies, like those affiliated with French and Chinese governments.
These agreements can result in increased property values in certain areas, which reduces housing affordability, and decreased property values in others.
Chapter 313 tax breaks socialize the cost of those local school districts’ deals to the rest of the state’s taxpayers by holding school districts harmless.
Given the economic situation with many unemployed Texans struggling from business closures due to the COVID-19 pandemic and government restrictions and following recent power outages, the Legislature should consider less spending, taxing, and regulating so Texans have more opportunities to prosper.
Invited testimony submitted to the Texas House Committee on Ways & Means
Today, the Texas Public Policy Foundation released five papers that together form a responsible strategy for the state’s immediate and long-term economic growth.
“These five approaches make for good economic policy anytime,” said TPPF Chief Economist Vance Ginn, Ph.D. “But they are especially important as the state recovers from government-imposed shutdowns. Together, these strategies will help return Texas to the prosperity we saw before COVID-19 and help get us there fast.”
The Five-Step Strategy is:
“During the shutdown, the state suspended some rules and regulations, proving they weren’t essential for health and safety in the first place,” said Rod Bordelon, TPPF’s Policy Director for the Remember the Taxpayer Campaign. “Instead of waiting for the crisis to end to re-evaluate these regulations, we should repeal them now and review others in an ongoing basis so that Texans aren’t held back by unnecessary restrictions.”
The Responsible Recovery Agenda also stresses that budget writers should avoid seeking additional state revenue through increased fees and taxes.
“Raising taxes is a costly endeavor — even more so in a recession because it distorts behavior at a time when the economy is weak, delaying recovery and leading to even greater economic stress,” said Benjamin Priday, Ph.D., Economist at TPPF. “Legislators should close budget gaps first by strategically employing the Rainy Day Fund and by trying to find ways to reduce spending.
The Responsible Recovery Agenda is a comprehensive approach to addressing the budget challenges Texas faces in the wake of COVID-19 shutdowns while also preserving the success of the Texas Model, which has strengthened the state’s economy.
For a historical look at the budget and other ways to improve the budget process, the Foundation also released The Real Texas Budget report.
The Tax Foundation recently published a map of the country illustrating the property taxes paid in each state as a percentage of owner-occupied housing value in 2018. Of all 50 states, Texas had the seventh highest property tax burden in the country, with an effective rate of 1.69% of occupied housing value. This burden is something that Texans across the state know too well.
The article accompanying the map acknowledges that Texas to some extent relies on high property taxes in lieu of other tax categories – i.e., income taxes – though other states without an income tax do not necessarily have a high property tax burden (e.g., Florida). Regardless, in an economy hampered by COVID-19 and government lockdowns and with homeowners under substantial financial and mental stress, local governments have a responsibility to reduce the burden on taxpayers.
The Texas Public Policy Foundation has put forward proposals to reduce burdensome property taxes by focusing on Texas embracing final sales taxes over property taxes and governments implementing sound budget practices.
A final sales tax system is a more attractive alternative to a property tax. Property taxes are calculated on oftentimes subjective property values, which can rise without a change in homeowners’ ability to pay; Texans can adjust their spending habits to a sales tax, however. This results in a compounding effect of property taxes on holders of property every year that reduces their ability to pay them, forcing many to lose their property and to never truly own it.
One way to ease the property tax burden across Texas is to buy down school districts’ maintenance and operations (M&O) property taxes, which is about half of the property tax burden. This could be done by limiting state spending and using any surplus funds to cut the local property tax until it is eliminated, which could take roughly a decade, moving Texas towards sales taxes as they are the state’s top revenue source. However, this could be difficult to maintain session after session with the limitations on state and local government spending to achieve this in a timely manner, if at all.
Another way is for the state to immediately replace school M&O property taxes with higher sales taxes. An immediate swap would eliminate the risk that the switch to a final sales tax would be only temporary, a failure common to past property tax relief efforts. However, an immediate switch may be politically challenging to implement, so a way to mitigate this is to limit state spending and use surplus funds to cut the sales tax rate over time.
Switching M&O costs to sales taxes is not the only measure local (or state) governments should adopt. The other, and possibly even more fundamental to reducing barriers for opportunities to let people prosper, is implementing sound budgetary practices.
By reducing government spending through things like freezing new hires and pay raises and placing a moratorium on incurring any new taxpayer-funded debt, there are plenty of opportunities to cut taxes.
Local governments should volunteer for third-party audits to determine where areas of waste can be eliminated along with expensive lobbying contracts and longevity pay. Ultimately, practicing zero-based-budgeting, whereby local governments must justify every expenditure, could help achieve setting budget priorities that support effective government programs.
Any government approach to supporting an economic recovery in the wake of COVID-19 must begin with easing the burden on Texas taxpayers, and that approach must include reducing the burden of soaring property taxes and implementing sound budgeting at all levels of government.
I provide options for how to substantially reduce the high property tax burden in Texas by limiting government spending with either a buydown of property taxes over time or a swap with sales taxes immediately so that Texans have more opportunities to prosper.
Lawmaker: At least 38 local government in Texas have attempted to raise property taxes above state cap
(The Center Square) – Several Texas counties have chosen to not raise county property taxes this year, keeping rates the same or lowering them in some cases. But 38 taxing entities have tried to increase property taxes over the state-mandated cap requiring taxpayer approval, state Sen. Paul Bettencourt said.
At a Texas Public Policy Foundation (TPPF) panel discussion last week, the Houston-area senator who serves as the Senate Property Tax Committee Chair said 16 counties and 23 cities attempted to increase taxes over the limit set by the legislature.
Austin was among them. The Austin City Council recently voted to increase taxes above the limit enacted by the legislature last year, and voters will either approve or reject it this November. Several cities rejected increases in property taxes, including Dallas and Longview.
For the fifth year in a row, Collin County announced it was lowering its property tax rate in order to keep homeowners’ bills roughly unchanged from the previous year. In the past decade, the county has adopted no increased revenue rates nine times.
Previously referred to as the effective rate, the no-new-revenue rate collects the same total amount of property tax revenue as it did the previous year. However, what homeowners owe might go up depending on their property’s value increasing. A static or lower rate on a higher value still results in a higher tax bill for some.
In Denton County, the new tax rate is below the current tax rate and the no-new-revenue tax rate. Plano County’s budget is based on a “no-new-revenue” property tax rate.
Tarrant County also kept its property tax rate the same, which is slightly below the no-new-revenue rate. But because of rising home values, the average property tax bill will increase by roughly $9.
“The problem with Texas property taxes has always been as property values go up, tax rates never came down," Bettencourt said. "So values inched up and in some cases increased by 10 percent each year and were never offset by taxes going down.”
Bettencourt helped pave the way for property tax reform in the last legislative session. SB2 reduced cap on potential property tax increases for the first time in 30 years, from 8 percent to 3.5 percent. HB3 placed a hard cap of 2.5 percent for school districts. Both were combined in the property tax bill signed by Gov. Greg Abbott.
Any attempt to increase taxes over the caps requires approval by voters.
Dr. Vance Ginn, chief economist at TPPF, said that the rollback rate was established in 1979. In 1981, it was raised from 5 percent to 8 percent when inflation was running double digits. But over the past 25 years, inflation hasn’t been above 4 percent.
In 2019, it was time to adjust the rates, Ginn said, to protect homeowners from ongoing increased taxation. It couldn’t have been more timely, he said, since within less than a year more than 4 million Texans filed for unemployment during COVID-19 restrictions and state and local governments were seeing less revenue.
It’s problematic that local governments “need to expand their budgets in some capacity by more than 3.5 percent,” Ginn said, “when Texas families are often times seeing their incomes fall dramatically from having some sort of income down to zero, [… receiving unemployment], and some of these local taxing entities are saying, ‘You know what, we need to raise our taxes more. By the way, the way we are going to do that is spending more along the way.’”
In Harris County, property taxes increased by 29 percent from 2014 to 2018, whereas population growth and inflation increased by 11 percent, Ginn said. The comparison between taxes and population growth and inflation is often used as a metric to determine how much the burden of government should grow to stay within the means of taxpayers, he said.
According to a recent WalletHub study, Texas ranked 32nd highest among 50 states for its overall tax burden of 8.2 percent. Texas property owners paid 3.95 percent in property taxes and 4.25 percent in sales and excise taxes.
It took a decade to get tax relief on both sides, Bettencourt said, adding that, “The pressure to spend more taxpayer money is ingrained in government.”
In this Let People Prosper episode, we discuss how we got to where we are today in our careers, which are driven by the desire to improve the well-being of people today and future generations. I'm thankful for their friendship and excellent work!
We discuss the need to rein in government spending so we can have the least burdensome tax system. Here's a write-up on what's going on with taxes and spending in Texas.
This conversation goes on a little longer than normal, but it's one that you don't want to miss a moment!
Thank you for watching and sharing it with your family and friends.
Vance Ginn, Ph.D.