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Texas House and Senate reach a deal on how to cut property taxes

A roofing crew begins to shingle a home under construction in the Pavilion Park development in north Midland on March 14, 2022.
Eli Hartman
The Texas Tribune
A roofing crew begins to shingle a home under construction in the Pavilion Park development in north Midland on March 14, 2022.

The deal would channel $12 billion to reduce the school property tax rate for homeowners and business properties, increase the homestead exemption, and create a pilot program to reduce taxes on certain residential and commercial properties. The legislation is expected to pass later this week.

After a monthslong standoff among Texas’ top Republicans, state GOP lawmakers finally struck a deal Monday on how to cut Texans’ property taxes.

The $18 billion compromise between the Texas House and Senate — which includes more than $5 billion approved for relief in 2019 — would give increased tax relief for the state’s 5.7 million homeowners and create a tax-credit pilot program for non-homesteaded properties. It would also cut taxes to small businesses and send billions of dollars to school districts so they can cut their tax rates across the board, according to details made public by state leaders Monday.

The proposal must clear both chambers before it heads to Gov. Greg Abbott’s desk. Abbott said he looks forward to approving it.

“I promised during my campaign that the state would return to property taxpayers at least half of the largest budget surplus we have ever had,” Abbott said in a statement after Monday’s announcement. “Today’s agreement between the House and the Senate is a step toward delivering on that promise. I look forward to this legislation reaching my desk, so I can sign into law the largest property tax cut in Texas history.”

Lt. Gov. Dan Patrick said the last week of negotiations among himself, Texas House Speaker Dade Phelan and members of both chambers “made the difference.”

“It has been a long road, but this is a great day for all property owners,” Patrick said. “It may have taken overtime, but the process has produced a great bill for homeowners and businesses.”

According to Phelan's office, the legislation, expected to be passed this week, includes more than $12 billion to reduce the school property tax rate for homeowners and business properties; an increase to the homestead exemption from $40,000 to $100,000; and savings on the franchise tax for small businesses. It would also include a so-called “circuit breaker” program for residential and commercial properties valued at $5 million and under. The program would be piloted for three years.

“Reducing property taxes, providing relief to small-business owners, and reforming our appraisal system will ensure economic growth and prosperity, and this agreement is a significant victory for all Texans,” Phelan said in a statement.

The new property tax relief bill, a franchise tax relief bill and the constitutional amendment required to enact the cuts were filed in the House on Monday. Similar proposals were expected to be filed by the Senate later in the day.

The deal marks the end of a stalemate among the state’s top Republicans that lasted nearly seven months as they butted heads over how to dole out $12.3 billion in new tax breaks budgeted by lawmakers earlier this year.

Republicans came to Austin this year with a nearly $33 billion surplus and big promises to use a big chunk of it to provide tax relief to Texas property owners, who pay some of the highest property taxes in the nation. But for most of the year, the heads of the House and Senate — Phelan and Patrick — couldn’t come to terms on how to do it.

The main dividing line came over whether homeowners or business owners would get a bigger tax break. Phelan and House lawmakers wanted to send the entire $12.3 billion to school districts to lower their tax rates, a kind of tax cut referred to as “tax rate compression.” Doing that would result in across-the-board cuts for all property owners, but it would most benefit business owners.

Abbott and conservative tax-cut warriors saw the proposal as a way to put the state on a path to eventually eliminating the school maintenance and operations tax, the bulk of the school property tax that pays for day-to-day school expenses like teacher salaries. But as the weeks dragged on, Abbott’s support for a compression-only tax-cut proposal seemed to wane as he encouraged House and Senate leaders to come to a deal and send him a bill.

Patrick and Senate tax-cut writers agreed with the House on allocating $12.3 billion for property tax cuts but wanted to use only 70% of that amount for tax rate compression so they could use the rest to pay for a boost to the state’s school district homestead exemption, the amount of a home’s value that can’t be taxed to pay for public schools. Patrick and state Sen. Paul Bettencourt, a Houston Republican and Patrick’s lieutenant on the tax-cut issue, pushed for raising the exemption from $40,000 to $100,000.

An earlier proposal sought by the House to put a tighter cap on how much taxable property values can rise each year — also known as an appraisal cap — appears to have been left out of the final deal. Instead, the new plan includes a pilot tax-savings program known as a “circuit breaker,” which calculates how much a person should pay in property taxes based on their income levels.

Those tax-credit programs provide targeted relief to certain residents, like seniors, when their tax bills take up too much of their income. Details of the plan that would be included in the Texas Legislature’s new proposal were not immediately released Monday morning.

Circuit breaker programs “are not as simple [as appraisal caps] but they will deliver benefits to the [low-income] people you are concerned about, without also throwing tons of money at your wealthiest homeowners,” Richard Auxier, senior policy associate at the Urban-Brookings Tax Policy Center, told The Texas Tribune earlier this year.

Texas doesn’t have an income tax or a statewide property tax, which would help verify a person’s income and make such a program easier to administer. An idea to implement a circuit breaker program died in the 1990s because it came with enormous administrative costs in the absence of an income tax, according to Every Texan, a progressive think tank in Austin.

Other states have a version of this type of program. Half of those are part of the income tax or property tax systems, while others are treated as rebates, according to an analysis by Every Texan. A successful program in Texas would likely need to be a rebate-style program, the analysis says.

With previous House plans being criticized for being more beneficial to wealthy homeowners and businesses than for lower-income Texans, the circuit-breaker pilot appears to be the most novel addition to Monday’s deal.

For much of this year, Phelan and state Rep. Morgan Meyer, a Dallas Republican and the House’s chief tax-cut writer, sought to tighten the state’s appraisal cap and extend the benefit to business owners — a push that came in response to complaints from residential and commercial property owners whose property values dramatically increased in recent years amid the state’s red-hot housing market and booming economy.

Housing and tax policy experts warned that such a proposal would have all kinds of nasty side effects without ultimately cutting tax bills and was a non-starter for Patrick and Senate Republicans.

While some circuit-breaker programs are targeted to renters or other specific groups of taxpayers, it was unclear Monday morning how exactly the Texas plan would work or who it would benefit most.

Absent from either chamber’s previous proposals was any targeted tax relief for the state’s 3.7 million renter households. House Democrats last week unveiled their own tax-cut package that would give tenants a cash refund equaling up to 10% of the rent they paid the previous year. But Republicans didn’t include anything like that in the package released on Monday.

Republicans and some tax policy experts argue that renters will benefit from the compression portion of the tax-cut package because landlords won’t pass as much in property taxes onto their tenants — thus resulting in smaller rent increases. But others say demand for the state’s red-hot rental market and a dearth of supply to meet that demand, not property taxes, have driven rent increases in recent years.


From The Texas Tribune

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