Texas plans to spend $51 billion on property tax cuts. It may not be sustainable.

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Property tax cuts aren’t free. In fact, they’re costing Texas a fortune.

The Texas House is considering a budget that would shell out $51 billion — 15% of the state's total two-year spending plan — to maintain and provide new property tax cuts. That number, more than the state allocates to transportation or higher education, is making even some Republicans nervous about the state’s ability to afford the tax relief if there’s an economic downturn.

If it were its own agency, Texas’ property tax budget would be the third costliest agency in the state, more than double what the state spends on public safety and criminal justice. The allocation exceeds the operating budget to run Texas A&M System’s 11 university campuses for two years. And it’s more than enough money to cover the estimated cost of a high-speed rail line from Dallas to Houston.

Texans pay among the highest property taxes in the country. The state doesn’t have an income tax and relies heavily on property taxes to pay for public services, especially public schools. For the last several years, lawmakers have sought to rein in those bills by sending billions of dollars to school districts to reduce how much in property taxes they collect from homeowners and businesses — a strategy they’re keen on duplicating this year.

“It's something that we can afford to do now,” said Rahul Sreenivasan, director of government performance and fiscal policy at Texas 2036, a nonprofit public policy group. “I don't know if it's something that we can afford to do on this scale every session.”

Lawmakers have drawn on massive state budget surpluses in recent years to pay for property tax cuts. A $33 billion surplus helped cover the $18 billion tax-cut package legislators greenlit two years ago. This time, lawmakers have eyed a $24 billion surplus to help pay for new cuts and maintain existing ones.

Budget analysts have warned that those surpluses were out of the ordinary — and will soon be a thing of the past. The injection of tens of billions of federal dollars into state coffers during the COVID-19 pandemic and higher-than-usual growth in sales taxes, driven by inflation, formed those surpluses, they said. Today, those COVID relief dollars are gone or spoken for. Sales tax collections, which make up more than half of the state budget, have slowed as higher housing costs and grocery bills — costs that don’t generate sales tax revenue — have bitten into Texas households’ budgets.

“Because of very specific, very unusual circumstances, we had a lot of money that we didn't expect to have,” said Shannon Halbrook, a fiscal policy expert at the left-leaning think tank Every Texan. “My fear is we're assuming that that money is permanent, or that we're going to have that kind of money going forward to keep paying for these recurring tax cuts every budget, every session. And that's just simply not the case.”

The state’s economy already had been projected to slow this year, and President Donald Trump’s tariffs have introduced a fresh round of economic uncertainty. And on Thursday, the U.S. Energy Information Administration said it expects demand for oil to shrink and gasoline prices to fall through 2026 — both of which would affect the state’s tax revenue collections from oil and gas production.

Meanwhile, it’s unclear just how deeply the Trump administration’s efforts to cut federal spending will hit the state budget going forward. Federal funds account for roughly 30% of Texas’ upcoming two-year budget.

Of the $51 billion in the budget set aside for tax cuts, some $44.5 billion will go toward maintaining property tax cuts lawmakers have enacted since 2019. That includes billions of dollars sent to school districts to replace funds districts would have otherwise collected in property taxes, thus lowering tax rates — a tax-cut method known as “compression.” It also includes billions of dollars lawmakers greenlit to raise the state’s homestead exemption for public schools — or the amount of a home’s value that can’t be taxed to pay for public schools. Voters decided to raise that exemption to $100,000 in 2023.

Lawmakers plan to put another $3 billion toward compression. State law requires Texas to put more money toward compressing school districts’ tax rates every two years as long as property values grow, so the $51 billion tax-cut tab is expected to grow in the future.

Legislators also have $3.5 billion set aside to pay for new cuts — expected in the form of another bump in the homestead exemption, more compression and tax cuts for businesses.

Lt. Gov. Dan Patrick said he favors further boosting the state’s homestead exemption because it would be harder for lawmakers to claw back those cuts versus other methods, like compression. Senators passed a proposal earlier this year to raise the homestead exemption from $100,000 to $140,000, and to $150,000 for older Texans. Patrick said he and House Speaker Dustin Burrows have discussed raising the exemption even further for Texans age 65 and above, to $200,000.

“One of the many reasons I favor the homestead exemption over increasing compression is that the homestead exemption is codified in the Texas Constitution by voters so future legislatures can never take property tax cuts away from Texas homeowners,” Patrick said in a statement, alluding to the two-thirds vote required in both chambers to repeal a constitutional amendment.

In contrast, Patrick said, “Future legislatures can decrease, or entirely eliminate, the amount of compression at any time,” as they are not baked into the constitution and could be rolled back with only a majority vote.

Cutting property taxes has been a major priority among Texas Republican lawmakers. But even some Republicans are sounding the alarm about how much tax cuts cost.

Senate lawmakers passed their proposal to raise the homestead exemption in February, with a unanimous vote and little fanfare. Still, some senators sounded a note of caution about the state’s ability to continue paying for tax relief into perpetuity.

“We’re building a large obligation, and it’s going to detract from things we absolutely can’t afford not to do, if we’re not careful,” said Sen. Charles Perry, R-Lubbock.

The tax cuts have provided some relief for homeowners: a Texas Tribune analysis of more than 50 property tax bills from 2023 found that those homeowners saw their bills fall nearly 28% from the year before. When adjusted for inflation, most homeowners’ tax bills were lower in 2023 than in 2018, the year before GOP legislators passed the first major round of relief.

But growth in property values in 2024 has eaten into those gains, with some areas seeing the typical homeowner’s bill increase by more than it fell the year before. After falling by more than 10% in 2023, schools’ property tax collections grew by more than 6% last year, according to estimates from the Texas Comptroller’s office.

As they were taking up their main tax-cut measures earlier this year, Senate lawmakers griped that, even after billions of dollars in relief, many of their constituents feel as though they are not getting tangible relief as local tax increases and rising insurance costs bite into progress made by the Legislature.

At the same time, lawmakers have effectively boxed themselves in. Voters would have to sign off on reducing the state’s homestead exemption, which would require a constitutional amendment. State lawmakers could theoretically reduce how much they spend on compression, but doing so would prove difficult if not impossible to sell politically.

That means lawmakers would have to make cuts elsewhere in the budget to sustain tax cuts should the economy hit a rough patch. For Halbrook, the fear is those cuts would come out of programs that serve low-income families.

“The sad fact of the matter is there’s not a lot of money spent on programs like that,” Halbrook said.

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