Texas Legislature’s ongoing battle over property tax reform

The latest move in the Texas Legislature’s ongoing clash over property tax reform — specifically the dispute over appraisals — has come from the lower chamber, which upped the ante by taking a key component of the Senate’s blueprint and adding it to its own.

After the marathon debate and initial passage of Senate Bill (SB) 14, the state’s ban on child gender modification, the House Ways & Means Committee voted out its substitute for SB 3, the Senate’s priority homestead exemption increase.

The vote was unanimous, including Rep. Chris Turner (D-Grand Prairie), who was the lone “no” vote on the House’s version back in March.

The Senate’s plan by Sen. Paul Bettencourt (R-Houston), approved unanimously by the upper chamber, featured $11.5 billion in old and new rate compression as well as a ramped-up school district homestead exemption to $70,000 for standard homeowners and $100,000 for elderly and disabled homeowners.

To address the business community’s concerns, the Senate’s supplemental bill would allot $1.5 billion to create an inventory tax credit and increase the business personal property tax exemption to $25,000.

Meanwhile, the House’s original plan by Rep. Morgan Meyer (R-Dallas) earmarked $12 billion for new rate compression — and $5.3 billion for previous levels of compression — but would lower the year-to-year cap on a homestead’s taxable value to 5 percent and expand it to all real property, not just residences. That passed the lower chamber with only a handful of “nays.”

The committee substitutes in the House — one for SB 3, and another for Senate Joint Resolution 3 — use the lower chamber’s original plan as a foundation: 15-cent rate compression amounting to $12 billion and the 5 percent cap across the board.

But it then takes the Senate’s homestead exemption items and then increases them. This new blueprint raises the standard homestead exemption to $100,000 and leaves in place the extra $10,000 exemption for elderly and disabled homeowners.

Just before the House passed its plan, Lt. Gov. Dan Patrick said it would be dead on arrival in the upper chamber. Many critics of the appraisal cap focus on its potential effect on the housing market — gradually, over years, untying the taxable value of a property from its market value, and then establishing an abrupt reset to that market value when purchased by a new owner.

On that, there are two points of comparison with wildly different outcomes: California’s 2 percent appraisal cap, and Florida’s 3 percent cap on homesteads and 10 percent cap on all other property.

Whereas California has seen the kinds of problems of which those opposed to the House plan warn — in part driving the rising number of people fleeing the state — Florida has not and is among the fastest-growing states.

While the Senate’s plan’s supporters hold up California as what the House plan would lead to, those who back the House’s plan point to Florida.

The other argument made by Patrick and his allies in this fight is that the 2019 voter-approval limit reductions — which lowered the 8 percent limit on non-voter-approved tax increases to 2.5 percent for school districts and 3.5 percent for cities and counties — “decoupled” the rate from the appraisal.

It remains the case that property tax bills equal the taxable value — appraised value minus exemptions — multiplied by the tax rate of a given political subdivision. School districts collect more than half the property taxes remitted in the State of Texas.

What changed in 2019 was the level at which localities could raise taxes without seeking voter approval — which has put downward pressure on efforts to increase property taxes, requiring more elections for voters to approve rates that’d bring in sums above the new limits.

The taxable appraised value and the rate are still tied together — and unless the property tax system is done away with entirely, they always will be — but now, it just takes less to trigger an election.

However, those taxation decisions are made on the macro level. Rates are not set on an individual property basis — that is done so by elected officials after appraisals have been established. They know what rate would increase, decrease, or keep level the amount of property taxes collected on the aggregate.

A taxable value cap would put downward pressure on the appraisal component of the equation, or at least limit its growth. In doing so, it could increase the leeway the rate component has before triggering an election. But ultimately what matters is the right side of the equation: the taxes owed by the property owner. Both inputs may rise and fall with either substantial or little impact on the output, which varies from property to property.

One argument for the appraisal cap is that it would restrict what a voter-approved above-limit rate could levy for an individual property owner. If voters approve a 5 percent tax increase, the new cap would halve the ceiling at which a given homeowner could be taxed compared with current law.

Now extend that same thought process to businesses whose taxable value currently fluctuates in line with their market value.

Meyer and Speaker Dade Phelan (R-Beaumont) have said their appraisal cap focus stems from the many concerns fielded from constituents primarily over appraisals, not tax rates. 

But the other criticism lobbed at the House’s version is exactly what the new substitute tries to erase.

In that “dead on arrival” press conference, Patrick focused heavily on the next-biennium relief that over-65 homeowners would receive from the Senate’s plan — estimated to be around $1,000 less than what an elderly or disabled homeowner’s property tax bill would be without the exemption hike.

The House’s plan takes that criticism and raises the bar from what the Senate laid out. In the lower chamber’s plan, the cost of the exemption increases was $3 billion for the standard homeowner and $500 million for the elderly and disabled.

No specific fiscal note for the substitute plan is yet available, but doubling the proposed standard exemption — from a $30,000 increase to a $60,000 one — would suggest a cost of $6 billion.

While the Senate’s plan prioritized elderly and disabled homeowners with the extra exemption, this House plan extends that to all homeowners, including the elderly and disabled, who still get the extra $10,000 exemption.

Exemption increases require continuous appropriation of dollars in bienniums to come — meaning that if an exemption increase is approved, future legislatures must continue to allot money towards maintaining that level in addition to any further expansions.

There is a third school of thought that both plans are insufficient and the entire sum of money behind property tax reform should be put toward rate compression — the most direct form of downward pressure in which the state injects its own funds to replace those collected through school district property taxes. Those also must be appropriated every biennium lest tax bills rise to their previous levels.

With this new version, the House can put the ball back in the Senate’s court should it pass the substitute — thus triggering a conference committee if the Senate objects to the House’s amendments, at which the two chambers would hash out a final blueprint. But Patrick’s previous statements so far show little intent on budging from his entrenchment against an appraisal cap reduction and expansion.

The new version is a clever political move, the latest one in a long chess game between the two chambers — one that’s already seen fierce criticisms lobbed across the bow, surly nicknames coined, and even the input of former President Donald Trump.

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