Why tax policy experts fear the Texas House plan to lower property taxes could have dire ripple effects

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The question of how to cut taxes for Texas property owners sparked one of the biggest fights between state lawmakers this year — but when it’s all said and done, either chamber’s proposal would save the typical homeowner about the cost of a nice dinner date each month.

Still, the two options are hardly alike.

While the Senate’s leader, Lt. Gov. Dan Patrick, advocates for an increase to the state’s homestead exemption, House Speaker Dade Phelan put his chips on a proposal to limit how much property appraisals — a key figure in calculating a tax bill — can rise each year. The Beaumont Republican wants to tighten the state’s cap on annual increases to a home’s taxable value from 10% to 5% — and extend the benefit to owners of business properties like grocery stores, restaurants and rental homes.

But tightening the appraisal cap would lead to all kinds of repercussions that have already played out in California, New York and other parts of the country, tax experts and critics of the proposal from across the political spectrum warn. They say placing a hard limit on how much appraisals can grow would create vast inequities between taxpayers, accelerate housing costs and disproportionately benefit wealthy homeowners.

Even interest groups that represent the kind of businesses the cap is intended to benefit — including the Texas Association of Business and the Texas Association of Manufacturers — have come out against it, arguing that the proposal would create an uneven playing field that would benefit longtime business owners over new ones.

“These California-style property tax caps have proven to be a failed experiment,” said Carl Davis, research director of the left-leaning Institute on Taxation and Economic Policy. “There’s no reason for Texas to emulate them.”

What’s more, experts say any savings from the appraisal cap would be easy to undo by cities, counties and school districts. Local governments set their tax rates based on the value of properties in their jurisdictions and how much revenue they need — and they could simply raise rates to offset revenue lost to the cap.

It makes sense for people to fret when they see their property appraisals rise and anticipate a high property tax bill, said Janelle Fritts, policy analyst at the conservative Tax Foundation’s Center for State Tax Policy. But that doesn’t mean capping them is the best way to bring about tax relief.

“People in leadership positions are trying to show that they care and that they’re doing something about [rising appraisals], even if the thing that they’re doing is proven to not quite work like they think it will work,” Fritts said.

What’s on the table

The two chambers have been in opposition for months over their competing proposals.

Republican leaders in the House and Senate want to use the state’s historic budget surplus to pump billions of dollars into property tax relief. And both chambers agree on directing $5.3 billion to continue paying for tax cuts approved in previous legislative sessions.

House leaders — including Phelan and state Rep. Morgan Meyer, a Dallas Republican and the House’s chief tax writer — want to tighten the appraisal cap and send the rest of the $17 billion they’ve proposed for tax cuts, more than $12 billion, to school districts so they can lower their tax rates.

Senate leaders have sought more targeted relief in their $16.5 billion tax-cut package. Their proposal would send just an additional $5.38 billion to school districts. But the cornerstone of their package would be raising the state’s homestead exemption — the amount of a home’s value that can’t be taxed by school districts — from $40,000 to $70,000, plus an additional $20,000 bump to seniors and tax credits for businesses.

Disagreement over the dueling proposals has led to considerable public friction between the two chambers, much of it playing out on social media. Patrick declared the appraisal cap idea dead-on-arrival in the Senate and gave Phelan the nickname “California Dade” — a reference to a similar policy passed in California in the 1970s. Phelan responded with a video with past clips of Patrick backing a tighter appraisal cap, a position Patrick has since abandoned.

“Every now and then, you have to kind of acknowledge maybe you were wrong,” Patrick said at an April 13 press conference. “I have. I came in as a senator who thought appraisal caps were the answer. I learned they weren’t.”

The chamber’s Ways & Means Committee on Friday voted out a version of the Senate’s homestead exemption bill that could be seen as either a compromise or a taunt. The House’s version raises the homestead exemption boost to $100,000, with additional language designed to benefit seniors. They also tacked on the House’s appraisal cap proposal and $12 billion in school tax cuts.

Representatives for Phelan and Patrick did not immediately return requests for comment about the Friday vote.

Various estimates abound showing how much homeowners would save under the House and Senate plans.

An analysis of each chamber’s proposal by the Texas Taxpayers and Research Association — a business-backed group that advocates for tax cuts and that has publicly backed Patrick’s proposal — estimated that, combined with tax cuts already built into the state’s proposed budget for the next two years, the average owner of a $300,000 home would save about $650 on their 2024 tax bill under the House proposal and about $760 under the Senate plan. Seniors would also save more under the Senate plan — $945 compared with $625 under the House plan, according to TTARA.

Each side has their competing figures on savings, which they say will grow for homeowners over time. Phelan’s office estimates that by helping school districts reduce their tax rates, the owner of a $350,000 home would save $1,275 over the next two years. Those estimates don’t appear to account for any benefit from the tighter appraisal cap.

Senate leaders give the House proposal more credit than its own backers, estimating that the House plan would save the same owner about $1,530 over the next two years, per figures provided by Patrick’s office. But that person would save about $1,748 over that same time span under the Senate’s plan, according to that chamber’s estimates, and seniors would pay $2,543 less than they otherwise would have.

“This is an enormous magnitude reduction in tax liability,” said state Sen. Paul Bettencourt, a Houston Republican and Patrick’s point person on property taxes. “For homeowners, it’s literally off the charts.”

Just how much homeowners would feel any benefit from the proposals in their bank accounts is debatable. Based on each chamber’s figures, the savings from each proposal range anywhere from $53 a month on the low end to $73 on the high end — with seniors on a fixed income saving $106 a month under the Senate plan.

Side effects of the appraisal cap

Phelan has said the tighter cap proposal is in response to homeowners and business owners’ worries that eye-popping appraisals are translating into higher tax bills.

“All I hear about are their appraisals — all the time — on their homes, their businesses, their rental homes,” Phelan said last month after the appraisal cap proposal passed out of the House. “It’s not fair, it’s not right and we need to treat all taxpayers the same.”

The idea of tamping down on rising property values as a way to provide property tax relief took off in the late 1970s after California voters adopted Proposition 13. The ballot initiative promised to reduce homeowners’ taxes after several years of rapidly rising home values by placing tight limits on property value growth as well as tax rates.

Now, 17 states and the District of Columbia have some kind of cap on how much properties’ taxable value can grow, according to the Tax Foundation. That includes Texas: Voters here adopted a statewide 10% appraisal cap in 1997.

The idea at the time was to give homeowners who lived in hot housing markets some cushion on their tax bill from a short-term spike in their appraisals, said Dale Craymer, head of the business-backed Texas Taxpayers and Research Association and former budget official for former Govs. Ann Richards and George W. Bush. If high housing demand causes property values to go up, the cap protects homeowners by limiting how much of their home’s new value is taxable.

The intent of the cap “was not to provide permanent tax relief, but it was to provide protection against huge market swings,” Craymer said.

Tax experts and property appraisers have cautioned that growing property values don’t necessarily go hand-in-hand with equally rising tax bills — and that values are only one part of the equation that goes into forming the final tax bill.

“The concern that increases in appraisals are going to lead to increases in property tax bills is largely just a misconception,” said Adam Langley, associate director of tax policy at the Lincoln Institute of Land Policy.

What’s more, tax policy experts warn, tightening the appraisal cap would have a number of negative consequences that have already come up in other states, like greater inequities between taxpayers.

For one, new homeowners could pay significantly higher property taxes than those who have been in their home for a longer time. That’s because the cap keeps a home’s taxable value from going up at the same pace as its market value — and the longer someone owns a house, the bigger the difference between those two figures grows.

Research shows that the gap between new and longtime homeowners’ tax burdens barely exists under the state’s current 10% cap, but a Texas Tribune analysis showed that it would likely widen under the tighter cap proposed by the Texas House.

For example, a Texas home bought at the median sales price of $147,500 in 2011 would’ve had a market value of $340,000 last year. Had the House’s proposed cap been in place since then, that home’s taxable value would’ve grown no more than 5% each year. At that pace, according to the Tribune’s analysis, the owner of that home would’ve paid taxes only on less than three-quarters of that property’s value last year, or about $252,000.

In comparison, the owner of a home purchased in 2022 at the same $340,000 market value as the other house would pay taxes on almost that full amount.

“I think you’ll see more people upset about appraisals when they have a similar property to their neighbors but are being taxed in a wildly different way,” Davis of ITEP said. “I really don’t see this reducing the amount of complaints over appraisals over the long haul.”

This has already borne out in places like New York City and California, which have tighter appraisal caps than Texas and where new homeowners paid significantly higher property taxes in 2021 than others who have been in their home for a longer period.

A tighter appraisal cap could also upend the state’s housing market, experts say, by encouraging people to stay in their homes for a longer time in order to hold onto their tax benefit. That could lead to less turnover in the housing market and, as a result, higher home prices stemming from a tighter supply of homes. In that scenario, it’s younger generations and those with lower incomes who would lose out, Davis said.

“People who own their homes now will eventually start to see some tax cut from this,” Davis said. “But what about their kids?”

A study published by the National Bureau of Economic Research concluded that people in California were holding on to their homes longer as a result of Proposition 13, contributing to the state’s high housing costs.

The effect might not be widespread. Studies in Florida and Muscogee County, Georgia, didn’t find a connection between those places’ appraisal caps and longer home retention. Nonetheless, Florida voters opted in 2007 to make the cap’s benefit “portable” — meaning they can take their tax savings with them whenever they buy a new home — in order to address those concerns.

The tighter appraisal cap would also mostly benefit wealthier and gentrifying neighborhoods, where property values are rising quickly. Wealthier households already are the main beneficiaries of the state’s current 10% cap, according to the comptroller’s office. Lower-income neighborhoods with more modest property value growth would be less likely to hit the proposed 5% cap — and would not get any help to lessen their tax burden.

That scenario has already played out in New York City, which limits taxable property values on single-family homes and small multifamily buildings from rising more than 6% a year. That cap, according to a report from the New York-based Regional Plan Association, has shifted the tax burden away from wealthy areas in Manhattan and Brooklyn and left lower- and middle-income neighborhoods elsewhere in the city paying higher effective tax rates.

And for all those potential consequences, experts say, some property owners might actually end up seeing little to no tax relief.

That’s what happened in Cook County, Illinois — home to Chicago — after the county adopted a 7% appraisal cap in the early 2000s, according to researchers at the University of Illinois. At first, the cap benefited about three-quarters of qualified Chicago homeowners, with some parts of the city even seeing their tax bills fall. But local officials eventually raised tax rates throughout the county to make up for the loss in tax revenue — and some homeowners wound up paying higher taxes than they would have without the cap, according to the study.

Tax rates in Texas have been falling since the Legislature enacted laws aimed at reducing them, and observers expect them to continue going down if the 5% appraisal cap is approved — just not as fast as they would without it.

“Even though I may benefit somewhat from the appraisal cap, I may end up a net loser because I’m going to be paying on a much higher tax rate than what I would have seen otherwise,” said Craymer, the TTARA head.

That’s what Daniel Ramos, head of Harris County’s Office of Management and Budget, hinted would happen if lawmakers passed a tighter appraisal cap. The amount of property tax revenue the county is allowed to collect “will not change” because it has nothing to do with property values, he said.

“Hammered”

The appraisal cap proposal does have its supporters. The idea passed with bipartisan support in the full House by a 139-5 vote. A smattering of industry groups like the Texas Restaurant Association and the Texas Homebuilders Association have come out in favor of the broader tax-cut bill it’s attached to, House Bill 2.

Galveston County tax assessor-collector Cheryl Johnson said she supports the appraisal cap proposal because it extends the benefit to businesses, which haven’t seen tax relief like homeowners have as property values have gone up. The average county tax bill for commercial businesses in her county — which includes restaurants, shopping centers and hotels — rose nearly 97% between 2019 and 2022.

“When I look at my business community on the island in Galveston, they’ve been hammered,” Johnson said.

But experts consider a bump in the homestead exemption a more equitable benefit — at least among homeowners, who would get the same tax credit, no matter the value of their property.

Phelan has said he’s open to once again boosting the homestead exemption, which Texans voted to raise from $25,000 to $40,000 last year. But he’s skeptical of how useful the move alone would be in a time of fast-rising property values. The more a house is worth, the higher the property tax bill gets — and the more its value rises, the less relief the homestead exemption provides.

Then again, if a home’s value rose without the benefit of a homestead exemption, a steeper jump in the tax bill would be guaranteed, said Lynn Krebs, a research economist at the Texas Real Estate Research Center at Texas A&M University.

“It’s always going to be more beneficial to have a higher homestead exemption,” Krebs said.

Plus, real estate experts don’t expect the Texas housing market to be as extreme as it’s been the past two years. And proponents of the homestead exemption in the Senate have argued that, unlike the appraisal cap, their proposal provides the same benefit, no matter what happens with property values.

“We’ve gone through a year post-COVID where, yes, there was a huge increase” in appraisals, Bettencourt said. “But now that’s in the rearview mirror.”

Disclosure: Texas A&M University, Texas Association of Business, Texas Restaurant Association 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.

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