Texas House’s property tax bill calls for $17 billion in cuts, tighter appraisal cap

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Texas House Speaker Dade Phelan’s main property tax proposal unveiled Thursday calls for $17 billion in cuts and a stricter cap on how much school district taxes can go up each year, setting up a stark divide between the Texas Legislature’s two chambers on how to provide tax relief to property owners this session.

Under Phelan’s proposal — to be carried in the House by state Rep. Morgan Meyer, a Dallas Republican — the state would cut school district property taxes by 28%. For an owner of a $350,000 home, that would translate to more than $1,000 in savings on their tax bills over the next two years.

But the most controversial part of Phelan’s proposal is a plan to place a tighter cap on how much more school districts can tax property owners each year and expand the benefit, which currently benefits only homeowners, to include commercial property owners.

Under state law, the value of a homeowner’s primary residence taxed by school districts can rise no more than 10% a year. Phelan’s proposal would lower that threshold to 5%. It would also apply the cap to properties like grocery stores, apartment complexes and rental homes, an attempt to deliver cuts to taxpayers across the board.

“We’re going to focus on property tax relief in a new way, in the likes of which we haven't done in many, many decades,” Phelan told a gathering of the conservative Texas Public Policy Foundation in Austin on Thursday.

Republicans prioritizing property taxes this legislative session are grappling with how much of the state’s nearly $33 billion surplus to spend on cuts.

But Phelan’s proposal, which would go before voters if approved by both chambers of the Legislature, will likely face stiff opposition in the Texas Senate, where Lt. Gov. Dan Patrick and state Sen. Paul Bettencourt, a Houston Republican and Patrick’s lieutenant on the property tax issue, have expressed deep skepticism of lowering the appraisal cap.

Patrick — who once supported lowering the appraisal cap — said Thursday that cutting the cap would undermine the success lawmakers have had lowering property taxes in recent sessions.

"Appraisal caps, lowering them now will destroy everything we just accomplished,” Patrick said at the Texas Public Policy Foundation gathering. “I think the intentions of the House are good, but that would be a disaster and undo everything we’ve done.”

Texas voters adopted the state’s current 10% appraisal cap in 1997 — intended to protect homeowners in hot housing markets against shocking rises in their property tax bill.

Tax experts and real estate industry analysts warn that lowering the appraisal cap would have severe ripple effects, like creating vast inequities in who pays property taxes and upending the state’s housing market. Those were the consequences in California in the decades since that state’s voters opted to impose caps on how much their homes could be taxed in the late 1970s.

Already, tax benefits from the state’s current 10% appraisal cap flow disproportionately to wealthier households, according to a recent report from the Texas Comptroller’s office. Tightening the appraisal cap would only exacerbate that disparity, critics say.

“It might affect more people with lower-value homes,” said Dick Lavine, senior fiscal analyst with the liberal-leaning Every Texan. “But on the other hand, it’s a bigger benefit for the people with the higher-value homes.”

Lowering the appraisal cap would also lead to higher home prices as they have in California, critics warn. Homeowners who stay in their home for several years would become increasingly less likely to move into a new one in order to hold on to their tax benefit. That would lead to fewer homes on the market — and thus higher home prices resulting from a tighter supply of homes.

Those who do buy homes will wind up with higher tax bills than neighbors who have owned their home for a longer period, Texas Association of Realtors board chair Marcus Phipps said.

“You shift the burden from the long-term owner to the new owner,” he said. “And who are the new owners of real estate? They’re typically going to be your younger population.”

Ultimately, homeowners wouldn’t see a major difference in their tax bill. Local governments and school districts would simply raise their tax rates to head off potential losses in revenue caused by the lowered cap, keeping tax bills at least level, critics argue.

“Appraisal caps are the cotton candy of tax policy,” said Dale Craymer, president of the business-backed Texas Taxpayers and Research Association. “They’re really sweet, but they have no nutritional value. They don’t cut taxes, they just shift them.”

Before Thursday, House and Senate leaders along with Gov. Greg Abbott appeared to arrive at a consensus for a total dollar amount to spend on property taxes over the next two years: $15 billion. Under budget proposals in both chambers, $5.3 billion would go toward maintaining existing cuts passed in 2019 but didn’t specify how they would use the remaining amount, though they noted it could go toward further buying down school property taxes or raising the homestead exemption again.

That’s one idea favored by Patrick and Bettencourt, who want to put $3 billion toward raising the state’s homestead exemption — the dollar amount of a home’s value that can’t be taxed — on school district property taxes from $40,000 to $70,000, which would net the owner of a home in a district with the state's average school tax rate $341 in savings on their annual tax bill.

The idea has gained bipartisan support in the Senate, drawing unanimous support from Republicans and Democrats in the chamber.

Skeptics of raising the homestead exemption have pointed out that only homeowners would benefit.

Phelan on Thursday didn’t dismiss the idea of raising the homestead exemption, but noted that with rising property values, any relief from a bump in the exemption would be fleeting.

“We have to do something for every single land owner, property owner in the state of Texas," Phelan said.

Staff writer Patrick Svitek contributed to this report.

Disclosure: Every Texan, Texas Association of Realtors, Texas Public Policy Foundation and Texas Taxpayers and Research Association have been financial supporters of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune's journalism. Find a complete list of them here.