Property Tax Relief in Texas: Plan to Eliminate School M&O Property Taxes

​Texas’ property tax system has turned property holders into renters, where government is their landlord and Texans who struggle to pay annual tax bills face confiscation of their properties. Additionally, the growth of government is harming taxpayers and the economy through higher taxes and more regulation.

For example, Eddie Wilson owns the landmark Austin restaurant Threadgill’sbut recently announced he must close a location soon noting that he is “Flummoxed and bludgeoned by property tax increases, the grim truth is that we can’t afford it on the slim margins you make on meatloaf and chicken-fried steak.”

Substantial, permanent property tax relief is needed.

The Foundation’s recent report provides a plan of limiting government spending to eventually abolish property taxes in Texas by starting with eliminating the school maintenance and operations (M&O) property tax—nearly half of the property tax burden in Texas.

The school M&O property tax is a good place to start because the level of student funding is determined by state funding formulas that are first funded by local property taxes and then by state dollars. Although there’s a lot of noise about whether local governments or the state legislature is at fault for a skyrocketing local property tax burden, the truth is excessive spending is the problem and taxpayers foot the bill regardless (see figure below). The relative ease of this process is lost with other local tax jurisdictions.

Our plan is simple: State and local governments would limit spending such that state revenue permanently replaces the school M&O property tax within about 11 years. In other words, every dollar not spent by the state or school districts will produce a 90-cent property tax cut for Texans until half of the property tax in Texas is eliminated.

Here are the plan’s details:

• Limit local spending:
  • Increases in city, county, and special purpose district property tax revenues will be limited to 2.5 percent per year. The limit can be exceeded with the approval of 50 percent of voters in an election with at least a 20 percent turnout.
• Limit state spending:
  • Future general revenue-related (GRR) revenue increases will be limited to 4 percent per biennium, which covers population growth and some inflation but less than the Conservative Texas Budget to provide funding for property tax relief.
• State dollars replace school M&O property tax revenues:
  • School M&O property taxes, estimated to be $24.77 billion in 2018 ($51.3 billion in 2018-19), make up about one-half of the heavy property tax burden Texans face.
  • Historical state GRR growth has averaged 10.08 percent in the two-year budget cycles (biennia) since 2004-05. 
  • Ninety percent of the 6.08 percentage-point surplus between future GRR growth (10.08 percent) and the spending growth limit (4 percent) will be used to eliminate school property taxes, with the state increasing state education funding each year to gradually replace M&O of each local school district’s property tax revenue.
  • The additional 10 percent of the surplus would remain in GRR to cover potential revenue volatility.
  • School districts will set their tax rate each year to reduce property tax revenue by the amount of the state’s replacement funding. Districts can only exceed this rate with the approval of more than 50 percent of voters in an election with at least a 20 percent turnout. Excess revenue raised by the vote will be recaptured by the state.
• Result: If the historical rate of GRR growth and the spending limits hold, Texas should be able to eliminate the school M&O property tax in 11 years. If GRR growth is lower, then it will take longer, or vice-versa. Regardless, the state would eventually fund 100 percent of school M&O statewide and shift toward a more prosperity-supporting sales tax system.

Table 3 shows how the plan could work mathematically given the above criteria:

Under this plan, Texans will experience substantially lower property tax bills immediately and slower growth in them over time along with the broader economic benefits of slower government spending and a lower tax burden. Other options, such as sufficiently broadening the sales tax base, that begin with spending restraint to replace the school M&O property tax may be considered to deal with this problem.   

​Limiting government spending and using state dollars to replace nearly half of the property tax burden that funds education would shift Texas toward a more efficient sales tax system to let people prosper.

https://www.texaspolicy.com/blog/detail/property-tax-relief-in-texas-plan-to-eliminate-school-mo-property-tax