Property Tax Relief Comes With Big Cost to State

If history is any guide, Texans will overwhelmingly approve a state constitutional amendment on Nov. 3 aimed at providing them some relief from rising property taxes.

But the expected savings on homeowners’ property tax bills, estimated at $126 on average, comes with a trade off: a permanent increase in state spending. Texas lawmakers will budget $600 million annually to cover the loss of revenue to school districts, which rely heavily on property taxes. That’s on top of about $8.4 billion already in the state budget each year to make up for three previous property tax relief measures implemented since 1997, according to the Legislative Budget Board.

All together, the state will be spending about $9 billion a year to offset property tax relief measures, or more than eight percent of the budget Gov. Greg Abbott signed in June.

“In many regards, we are creating a double taxation,” said state House Ways and Means Chairman Dennis Bonnen, R-Angleton. “Most Texans aren’t going to see a reduction in their property tax at home and they are now and forever going to pay $600 million a year for this homestead exemption to the state.”

Bonnen was openly critical of property tax relief efforts throughout this year’s legislative session. Faced with strong interest among lawmakers to address fast-rising property tax bills, he ultimately backed a pared-down version of the Senate's proposal as part of a larger tax cut deal. 


Proposition 1 will ask voters to amend the state constitution by increasing the homestead exemption for school districts from $15,000 to $25,000. The measure also prohibits state officials from ever levying a tax on real estate transactions.

Early in the session, Lt. Gov. Dan Patrick made his interest in the issue clear by designating the leading proposal Senate Bill 1, the bill number traditionally used for the state budget. The measure ultimately passed both chambers and received Abbott’s signature, but voters must still weigh in.

"This is long overdue because property tax bills have skyrocketed since 1997, but the homestead exemption has remained the same," said state Sen. Jane Nelson, R-Flower Mound, who chairs the Senate Finance Committee and was the lead author of SB 1. "Homeowners need a break. The state is providing the relief, so the state needs to cover the costs."

For many Texans, the tax relief from Proposition 1 is likely to be underwhelming. In 11 of the state's 15 most populous counties, the expected savings on 2015 tax bills of between $115 and $154 are likely to be wiped out by appraisal increases, according to an analysis released by the House Ways and Means Committee. 

Backers say it’s still worth it, largely because of how fast property values are increasing in many parts of the state. Critics who focus on the costs forget how rising property tax revenue impacts the complex formula Texas uses to fund public education, said Dale Craymer, president of the business-backed Texas Taxpayers and Research Association

“The way school finance works, as property values increase, that reduces the demand on state aid,” Craymer said. “A part of what the state is doing with these tax relief efforts is pouring back the benefits of these rising values back into the schools.”

The liberal Center for Public Policy Priorities backed property tax relief as the “least worst option” for a tax cut during the session, and the cost to the state is partially why, said fiscal analyst Dick Lavine. Though he would have rather seen lawmakers invest the money in underfunded areas, raising the homestead exemption at least forces the state to shore up its share of public education funding, which Lavine described as inadequate.

“Schools will get a little less property tax revenue from homeowners and a little more money from the state,” Lavine said. “At least it’s a small step in the right direction.”


Texas hasn’t increased its homestead exemption since 1997, when voters agreed to raise it from $5,000 to $15,000. For that first year, the cost to keep schools from losing tax revenue was $511 million. It’s now $600 million annually, according to the budget board.

Three years later, then-Gov. George W. Bush approved a tax relief package that included $1.35 billion in property tax cuts. The state continues to pays $685 million each year to cover that.

The biggest property tax relief package came in 2006, when then-Gov. Rick Perry approved a plan to lower school property tax rates. The annual bill for that measure: $7.1 billion. Despite the large investment, the tax relief was widely ridiculed, as many Texans still saw their tax bills grow due to rising appraisals and higher local tax rates. Making matters worse, expectations that a new business franchise tax would raise enough revenue to make up for it also never materialized.

Among the biggest supporters of this latest round of property tax relief is the Texas Association of Realtors, which is sending out four million pieces of direct mail supporting it and planning radio and television ads in major markets, said legislative affairs director Daniel Gonzalez. Concerns about the measure's cost ignore the billions of dollars the state left in its coffers this session, he said.

“The same argument could have been made in 1997 when they tripled the homestead exemption and we’ve been fine over the last 18 years of paying for that,” Gonzalez said.  “We believe that the state finances are going to be just fine going into the future and paying for it.”

Bonnen said he thinks Texans should vote for Proposition 1, but that they should have low expectations of its impact and not push state lawmakers to implement similar measures in the future.

“We need to be out of the business of trying to cut taxes we don’t have any control over,” Bonnen said. “The only true way to reduce a tax is to reduce it at the level it’s levied. Locals set the rate and they control the appraisal.”

Disclosure: The Texas Association of Realtors and the Center for Public Policy Priorities are corporate sponsors of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.

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