The Texas Legislature Finally Passes Property Tax Reform

Just a few weeks ago, THLA published a blog post asking the question whether the Texas Legislature would finally pass meaningful property tax reform.  This week, they did just that, passing three bills compressing school district tax rates (the largest component of property tax bills), increasing the residential homestead exemption from $40 thousand to $100 thousand, and increasing the business franchise tax exemption from $1.234 million in annual revenue to $2.47 million in annual revenue. 

This historic $18 billion tax cut is funded from the state’s budget surplus, and it will have a substantial positive effect on Texas lodging property owners.  Because the property tax reform bills will require a constitutional amendment, Texas voters will vote on the measure in the November election.

 

Property Tax Basics: 

Two factors affect how much a property owner must pay in property taxes:  The taxable appraised value of the property, and the tax rate. Both factors change every year, so a property owner rarely pays the same amount in property taxes two years in a row.

When looking at the estimated property tax bill, most hotel owners focus on the taxable appraised value of the property, and they then work hard to get that taxable value lower by using a property tax agent. 

Taxable appraised values are important when it comes to reducing property taxes, but they are not the whole story.  In 2019, THLA supported important property tax reform legislation that was aimed at reducing the tax rate component of property tax bills. That legislation essentially caps the amount of tax revenue that cities, counties, and school districts may collect year-over-year. 

Cities and counties may not collect more than a 3.5 percent increase in total property tax revenue over the previous year without holding an election to approve a larger increase. And school districts must reduce their tax rates when property values increase beyond a 2.5 percent threshold over the prior year. 

This means that while property owners have seen rapid growth in their property’s appraised value in recent years, the actual amount of property tax owed has not grown as quickly.

In Texas, property tax revenues entirely fund local government functions such as the city, the county, and the public school district.  While the State of Texas regulates how property taxes are levied, the State treasury does not take in property tax revenue.  The largest component of nearly every property tax bill is the portion for the local independent school district, with the remaining component of the property tax bill split between the city, the county, and special districts. 

In addition to receiving local property tax revenue, school districts also receive some funding directly from the State of Texas, and the State has a constitutional duty to ensure a minimum level of funding for all public schools.  If the State of Texas allocates more state funds to independent school districts, the Legislature can “compress” local school district tax rates, thus lowering all property owners’ tax bills. 

Property tax reform: SB 2 and HJR 2

In the second special session, the Legislature successfully passed legislation that will meaningfully reduce property taxes in several ways.  Most importantly for commercial properties such as hotels, SB 2 allocates more than $12 billion to reducing public school district tax rates.  Because this tax rate compression takes aim at the largest portion of a property tax bill, it will go a long way towards reducing property tax bills for commercial properties.  It will require the Legislature to continue funding public education to avoid a springboard effect in the future

The legislation also contains a new test-concept for Texas property tax policy referred to as a “circuit breaker,” which will help smaller commercial property owners at least temporarily.  For the 2024 and 2025 tax years, commercial and non-homesteaded residential properties valued at $5 million or less will receive a 20 percent cap on appraised value increases.  This test-concept is currently set to expire in 2026, and the Legislature intends to revisit it before that time to determine its effectiveness.

Additionally, SB 2 and HJR 2 increase the residential homestead exemption from $40 thousand to $100 thousand.  The residential homestead exemption does not affect commercial properties, but homeowners will see additional savings on their property tax bills for years to come.

Business franchise tax exemption increase: SB 3

In addition to the property tax reforms, somewhat unexpectedly, the Legislature also took up a significant business franchise tax exemption increase.  Texas franchise taxes are a tax on a business entity’s margins.  Currently, the first $1.234 million of a business’s annual revenue are exempted from the franchise tax.  With the passage of SB 3, the Texas Legislature increased that exemption to $2.47 million in annual revenue.  This will take effect on January 1, 2024, and is expected to exempt 67,000 Texas businesses from paying the franchise tax altogether.

In all, the results of the Second Special Legislative Session are extremely positive for Texas lodging operators, and the passed legislation continues to make Texas a great state for business.