Billions in property tax cuts need Texas voters’ approval before taking effect. Here’s what you need to know.

Earlier this month, during the second special session of the 88th Legislature, lawmakers passed three bills to spend $13.3 billion of a historic state surplus to rein in Texas property taxes, which are among the highest in the nation. The extra cash in the state coffers was attributed largely to record sales tax collections — which every person pays when making purchases in Texas — when inflation soared nationally after the pandemic. Added to $5.3 billion budgeted in 2019 to lower school tax rates, a total of $18.6 billion in tax cuts would go to property owners this year.

Senate Bill 2, at a cost of $12.7 billion, details the proposed property tax cuts, while Senate Bill 3, which costs about $600 million, adds cuts to the franchise taxes some businesses have to pay. Both were authored by state Sen. Paul Bettencourt, a Houston Republican.

These measures will not appear on the ballot. House Joint Resolution 2, by state Rep. Will Metcalf, R-Conroe, is the constitutional amendment that will go before voters in November and would authorize the state to enact the cuts in those two bills.

Proponents of the package wanted a constitutional amendment so that any changes that lawmakers might want to make to certain parts of the bill in the future would have to be approved by voters first. The amendment is also needed so that the cost of all of the tax cuts this year won’t count against spending limits imposed by voters and lawmakers on the $321.3 billion state budget for the next two years.

There are five key parts to the tax-cuts package.

• School tax compression: About $7.1 billion would be sent to Texas school districts so they can lower the taxes they levy on property owners, Bettencourt said. The move, known as “compression,” would reduce school districts’ maintenance and operations property tax rate by 10.7 cents per $100 of a property’s valuation. The M&O tax, as it’s known, helps pay for public education costs like teacher salaries and school building maintenance and makes up the largest chunk of most property owners’ tax bill.
• $100,000 homestead exemption: An estimated $5.6 billion would be used to more than double the current $40,000 property tax exemption available to all Texans who own the home that serves as their primary residence. A homestead exemption is the amount a homeowner can take off the value of the house they live in before it is taxed. For example, the owner of a $350,000 home is being taxed at $310,000 under the current exemption for most homeowners. The same house would be taxed only on $250,000 under the homestead exemption approved this year.
• Temporary 20% appraisal cap: The law would establish a limit on appraisals for commercial, mineral and residential properties that do not have a homestead exemption and are valued under $5 million. Texas counties’ appraisal districts would not be allowed to increase the taxable value of any of those properties by more than 20% each year, for the next three years. The program would end in 2026 unless lawmakers and voters decide to continue it.
• Franchise tax exemptions: The legislation — which is not a property tax cut but was included in the package as another tax relief measure — would double the amount of money a business can make before it’s required to pay the state’s franchise tax, which is levied on larger entities doing business in Texas. That limit would go up from $1.24 million to $2.47 million. In addition, businesses that don’t meet the new threshold for having to pay franchise taxes would no longer be required to file forms to report those taxes.
• Elected appraisal officials: County appraisal districts are currently appointed positions and can vary in size, with a typical board having about nine members. Under the new legislation, each appraisal district’s board of directors will now include three positions elected by a majority vote at a county general election for four-year terms. Lawmakers said the change would hold the people who oversee appraisals more accountable to the property owners their decisions affect.

If the changes in the tax code that require voter approval get the green light, they would mostly go into effect automatically with no action required by property owners.

The changes to the franchise tax code, the 20% appraisal cap and the M&O tax rate compression would all show up on tax bills and require no special action.

Owner-occupied properties that already have a homestead exemption would also see that benefit automatically increase from $40,000 to $100,000 with no action required.

But if a homeowner lives in their home and hasn’t gotten the homestead exemption, they need to apply for it through their county’s appraisal district office. In most cases, the exemption can be retroactive up to two years. Once a homeowner has the exemption, they do not need to reapply for it every year; it stands until the homeowner no longer lives in the home.

Some 5.7 million households in Texas are homesteads, the tax-friendly word for a home that serves as its owner’s primary residence. These can be single-family homes, duplexes or even a condo.

Policy analysts and lawmakers project that the expanded homestead exemption and lower school tax rate would reduce a Texas homeowner’s property taxes by an average of 41.5%, or about $1,300 per year for a $350,000 home.

The expanded franchise tax exemption and 20% appraisal cap do not apply to property that already gets the homestead exemption. But the current 10% appraisal cap for homesteaders will remain in place.

Let’s look at a few examples. The value of a Corpus Christi homeowner’s sprawling property near the waterfront was $650,000 last year, and under the current $40,000 homestead exemption, she paid taxes on $610,000 of that property’s value. This year, the home’s property assessment was capped at $715,000. Under the proposed $100,000 exemption, the homeowner would pay taxes on $615,000 of her property’s value — instead of paying taxes on $691,000 under the current exemption. Based on current tax rates, she’d likely save more than $100 per month on her tax bill.

Meanwhile, the owner of a home in the Panhandle city of Amarillo valued at $315,000 this year would get savings of about $80 per month. And the owner of a million-dollar home in Spring, near Houston, might save about $150 per month.

In addition to the new $100,000 exemption, Texas homesteaders with disabilities and those 65 and older will continue to qualify for the extra $10,000 exemption they are already allowed to receive — for a total exemption of $110,000.

The new law also addresses an issue that cropped up when the exemption was raised from $25,000 to $40,000 in May 2022.

Texans 65 and older and those with disabilities, many of whom are on fixed or limited incomes, have had their school property taxes frozen for many years to protect them from rising tax rates and property values. But because of the way the $40,000 exemption increase was written, those homesteaders did not benefit from the higher exemption when voters approved it last year.

If the constitutional amendment passes, it would provide money for those homeowners who lost out on tax savings last year due to their frozen taxes and it would ensure they benefit from any future exemption increases that might lower those taxes.

These groups of homeowners would also see their school taxes decrease. The school tax rate reduction and the $110,000 homestead exemption are expected to lower property taxes for senior and disabled homeowners by about $1,450 per year on a $330,000 home, Bettencourt said.

If voters approve the new cuts, entrepreneurs who own the property their businesses occupy would see their school M&O taxes decrease by 10.7 cents per $100 valuation.

In addition, commercial properties valued at less than $5 million would be protected from excessive year-over-year value upsurges with a 20% cap on how much a property’s appraisal can go up. The cap would be in place for the next three years until lawmakers and voters decide whether to renew it.

It wouldn’t be necessary for a business to be headquartered in Texas in order to get the property tax breaks; any land it owns within the state would qualify to receive the benefits if it doesn’t exceed the value limit.

Here’s an example. A businessman in Corpus Christi saw the value of his office on a prime parcel of waterfront downtown increase by 18% from 2021 to 2022 — and then by 48% from 2022 to 2023, according to tax records. In fact, since 2019, his property has nearly doubled in value.

The property is now worth $638,000. Because that amount is under $5 million, the proposed appraisal cap would apply to his building — and it would take $123,000 off his valuation this year.

Property that doesn’t increase in value more than 20% this year won’t see any benefit from the cap.

Business owners who rent the property they use would not be able to take advantage of the proposed school tax cuts or the 20% appraisal cap, unless they are in a commercial lease that ties rent to property taxes.

But they could take advantage of some of the franchise tax savings, just like businesses that own the property they’re on.

The tax-cuts package would also double the amount of revenue a business could make before it has to start paying franchise taxes from $1.24 million in a year to $2.47 million. The move would remove roughly 67,000 additional small-to-medium businesses from the franchise tax rolls.

Businesses that don’t meet the new threshold for franchise taxes would no longer be required to file $0 tax returns, saving them administrative and labor costs.

Large businesses and corporations that own property in Texas, whether they are headquartered in the state or not, would qualify for the across-the-board decrease in school taxes.

Their business properties would also qualify for the 20% cap on appraised value increases each year as long as no individual property is worth more than $5 million. Eligibility would be based on the value of each parcel of property — not the entire land portfolio owned by a single business.

However, several types of businesses wouldn’t qualify for these benefits, including those with a public access airport or whose land is dedicated for agricultural use; timber production; individual or group sporting activities; parkland or camping; development of historical, archaeological, or scientific sites; or the conservation and preservation of scenic areas.

Landlords would qualify for the reduction in school property taxes.

Rental properties valued under $5 million each also would qualify for the year-over-year 20% cap on appraisal values for the next three years.

Here’s an example of how this would work for a residential landlord. The owner of several duplexes in a high-demand neighborhood on Austin’s central eastside saw one of his properties jump in value by 54%, from $359,000 in 2021 to $554,000 in 2022. This year, the property’s value actually decreased slightly, which means he wouldn’t need the 20% appraisal cap.

But his school taxes in the Austin Independent School District would still drop by 10.7 cents per $100 of property valuation, potentially saving him close to $600 per year in property taxes.

Whether he chooses to pass the savings along to his renters is his decision and not a requirement in the bill.

Now let’s look at a commercial landlord. In Brenham, the Mars & Space Investment LLC owns a 1.3-acre property that has a laundromat, a tax services group, a pest-control business, a gas station and convenience store and a donut shop on Alamo Street near downtown.

The value of the strip, with the land and buildings, shot up from $373,000 in 2021 to $770,000 in 2022 — a whopping 106% increase. It was valued at $972,430 this year, a 26% increase over 2022.

The company would be able to benefit some from the 20% cap if the property’s appraisal, which is currently being protested by the owners, doesn’t decrease.

People who pay rent to a landlord for their home are not guaranteed any tax cuts from the new property tax package unless their rent is tied at least in part to tax rates, which is rare in residential leases.

The proposed law does not require landlords to pass along any savings from property taxes to the occupants of the property. Democratic lawmakers tried to add a provision allowing renters to claim tax rebates tied to their incomes, but the effort failed.

Supporters of the package say that the appraisal cap on small business properties would allow landlords to avoid increasing rents at the pace they’ve been rising in recent years, and that the market resulting from lower appraisals would help drive down prices through competition.

But critics of this argument say that the housing crisis in Texas is driving rent costs more than property taxes, so whether renters would ultimately benefit from the tax cuts remains unclear.

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