Overview of Property Tax Relief Proposals in Texas

It's great to see that state officials in Texas are debating how to provide one of the largest tax cuts in the state's history. Unfortunately, that amount is only about $12.3 billion in new relief (an additional $5.3 billion to maintain past relief) of the at least $33 billion surplus. And given that the largest property tax cut was $14.2 billion for 2008-09, the state would need to provide $21 billion in new relief this time for it to be the largest tax cut in Texas history so that Texans can have the same purchasing power of relief as in 2008.

While there's a lot of debate of how the state should provide property tax relief of school district maintenance and operations (M&O) property taxes, the best way to provide the most relief to everyone is through compression, which is using state dollars mostly through sales taxes to buy down school district M&O property taxes that the state mostly controls with its school finance formulas, and it is the best way being discussed to get those taxes to zero.

The Texas House already passed HB1 in the first special session that provides $12.4 billion for a 16.2-cent (per $100 valuation of property) compression of ISD M&O property taxes.

Meanwhile, the Texas Senate already passed SB1 that provides $12.1 billion for 10-cent compression and a $60K increase in homestead exemption to $100K for ISD M&O property taxes.

Texas Governor Greg Abbott then tweeted that his plan is the plan outlined by the Texas Public Policy Foundation which uses state surplus dollars for compression of ISD M&O property taxes each session until they are zero.

I’m very familiar with this plan as I co-authored the original version with my former colleagues at TPPF in 2018. The plan has been through multiple iterations. My July 2021 co-authored paper looked at this buy-down approach of using 90% of state surplus dollars above a stricter spending limit of population growth plus inflation to compress school M&O property taxes until they are zero within about a decade or a tax reform that would broaden the sales tax base to eliminate those taxes immediately without raising the rate based on a dynamic economic model. And the latest was a December 2022 co-authored paper where we address the affordability crisis in Texas and how the buy down plan would help with this while providing more economic growth.

​I also wrote a 2023 paper updating this based on how quickly this could be done if a frozen budget with zero growth was used to provide more surplus funding to eliminate these property taxes. And I also wrote another 2023 paper noting how there is no need to fear about a recession or reduced revenue as there would be the need for spending restraint or cuts, plenty of money in the rainy day fund, or excess reserves held by school districts to address any shortfall to maintain the relief and fund public education. ​

Two professors at Rice University also studied different reforms in 2018 of the buy down approach and the sales tax expansion approach to eliminate school M&O property taxes and they found that these would provide substantial benefits to the state.

Compression is best because everyone benefits, including from the dynamic effects of more growth, more jobs, and lower prices, and it's the only way that's being discussed today to get the school M&O property tax rate to 0%. The other path by the Senate is to raise the homestead exemption from $40,000 to $100,000 but that will never eliminate those taxes and will push the burden of funding spending to everyone else making the system less equitable while evaporating any relief quickly from appraisal growth and making the path to elimination harder .because rates will rise from it.

Given the different approaches being discussed by the House/Governor and Senate/Lt. Governor, I did an analysis of the median valued home in Texas of $350,000 in Austin, Houston, and Dallas. I used the tax rates for each of these locations and had the home increase in value by 10% per year, which is the maximum growth for a homestead under current law. I didn't change anything else to provide an apples-to-apples comparison of a tax reform in 2023 to estimate what would happen over the next five years given a 1) $60,000 increase in the homestead exemption, 2) SB 1 with $60,000 increase in the homestead exemption and 10-cent compression, 3) HB 1 with 16.2-cent compression, and 4) what would be largest tax cut in Texas history with a 25-cent compression. I should note that this modeling is just on a homestead so doesn’t account for the much more broad-based effects of the compression scenarios.

Austin
The following three charts are for Austin, including Austin ISD, to see what these four scenarios would look like given the assumptions above in each year.

The first chart shows what would happen for total property taxes (i.e. ISD, city, county, and special purpose district property taxes) under these scenarios compared with the total tax paid of $5,945 for a $350,000 home in Austin, which the results show that SB 1 and the 25-cent compression are similar but both of them would have only one year of lower total property taxes until 2025 when the amount paid would exceed that of 2023.

The second chart shows similar results as SB 1 and the 25-cent compression have the greatest effects on the 2023 ISD M&O property taxes of $3,089 but HB1 also provides relief until 2028 when the amount paid would exceed that of 2023.

​But, more importantly, given these are only homesteads and don't account for families who pay rent or own a business, the third chart shows that HB 1 with 16.2-cent compression and the 25-cent compression cut the tax rate the most over time as this compression in just 2024 continues to buy down the rate as values increase by 10% in this example.

Houston
​The following charts are for Houston with similar results for each of the scenarios. ​

Dallas
The following charts are for Dallas with similar results. 

I recently explained how this would work and how compression is the gold standard with the only meaningful way to eliminate school M&O property taxes that are being discussed now in my conversation on CBS News Texas.

I also recently wrote how the Texas Legislature had the largest spending increase in Texas history this session thereby not providing enough in property tax relief. I argued that Gov. Abbott should veto the budget or at least $8 billion of budget items and use it for compression so that Texans get record relief.

It should be noted that compression will help renters. The Texas Comptroller's report (see figure below) finds that 26% of school property taxes are passed along to renters, and businesses submit 52% of those taxes but people pay for them through higher prices, lower wages, fewer jobs, and higher rent.

Simple supply and demand shows that the property taxes would rotate the private market supply of housing leftward thereby raising rents and lowering the quantity supplied compared with the free market. In other words, the market does set the rents but that market is distorted by property taxes so removing those school taxes would help push down rents through competition.

When the landlord has a vacancy and is paying lower property taxes, then she will lower the rent given lower cost to attract tenants. It may not happen overnight but it will as that’s how competition works, and those biz that don’t will by forced out of the market through losses.

This wouldn't just be a shift in supply of housing that would reduce rents, which would happen some when this tax is cut and certainly when it’s eventually eliminated, but that’s not the only way.

There’s also movement down the demand curve as the supply curve corrects to the private supply curve (S1) rather than the distorted supply curve (S2) with the ad-valorem property tax which will lower prices and increase the quantity supplied. This is through competition which will happen as consumers will have more negotiating power and landlords will want to rent out every unit but won’t if they don’t lower their rents as their competition will because their costs have been reduced.

From the fact that property taxes are going down there’s a reduction in cost by the landlords so they have the ability to get more renters at a lower rent. And renters would know this as property taxes go down or they will go to another location. Hence, more consumer power, which the consumer has much power in every market if they choose to wield it, especially jelly when govt gets out of the way.

It wouldn’t change rents overnight as many are in leases, but it would over time. One of the issues contributing to the affordability crisis in #Texas especially for lower-income folks is skyrocketing property taxes. Any relief would be most appreciated by 100% of property holders through compression.

​​Lowering school M&O property tax rates through compression is the best path for everyone to benefit, not only from lower taxes but also more economic growth, and for those taxes to go to zero.

Many groups have already stated their support for the buy down plan, which is also supported by the Governor and the House has passed much of it though they need to add HB 5 by Rep. Briscoe Cain which would put in statute the buy down plan to zero.

At the end of the day, I'm glad Texans are talking about property tax relief as other states have been cutting taxes so Texas can't sit back and be competitive with other states without spending less and cutting taxes, as corporate welfare makes the problems worse. The Legislature unfortunately passed a revamp of the expired Chapter 313 in HB 5 during the regular session that is now called Chapter 403, which provides property tax abatements issued by school districts to mostly big businesses. Fortunately, when school district M&O property taxes are eliminated, this corporate welfare will be eliminated, too.

There are so many reasons to eliminate this tax. Texas will be an economic juggernaut! And what's maybe the most important is that Texans will have more of their right to own property preserved instead of renting from the government forever from this immoral wealth tax known as property taxes. Raising the homestead d emotion might be a part of the final deal, but we should remember that the homestead exemption picks winners and losers, is not sound tax policy, and has been tried three times (1997, 2015, and 2021) without substantial reductions in those taxes paid.

​I'm okay with broadening the sales tax base and eliminating school M&O property taxes immediately and using surplus dollars to buy down sales taxes over time. This would also broaden the sales tax base for local governments which should use those funds to buy down their own property taxes and limit their spending with a restrictive limit like the state's based on population growth and inflation to use surplus dollars to buy down the rest until they are zero. But there isn’t the political will yet do this approach so the best way right now is the buy down path for school property taxes by the state and local government buying down their own could happen over the next decade for the eventual elimination of all property taxes in Texas.

The time to start doing this is now. Get tax relief done for Texans!