Texas Property Tax Relief: Details & Analysis
Texas continues to enjoy strong revenue growth, and reducing the property tax burden is a priority for the Lone Star State. However, the recent legislative session ended in an impasse, with the Senate and House unable to agree on how to deliver property tax relief. The current special legislative session appears to be similarly stymied.
Texas’s robust surpluses create an opportunity to use state funds to lower local property taxes. However, it remains important for legislators to pursue a principled approach to rate compression, rather than enacting a plan that will simply shift the tax burden in nonneutral ways.
Texas offers individual homeowners a homestead exemption, which reduces the taxable value of a principal residence and lowers the amount owed in property taxes. The homestead exemption in the state was recently increased substantially, from $25,000 to $40,000, and the Senate is currently exploring a further increase to $100,000. Over time, this policy shifts a greater share of the property tax burden to commercial property owners, thereby increasing costs on businesses that already pay a disproportionate share of Texas’s taxes.
This is also bad news for renters, since multi-unit rental properties are commercial real estate. While the rental property owner remits the tax, much of the economic incidence is borne by the lessee in the form of higher rent. Providing property tax relief through a homestead exemption excludes renters, and if property tax rates ever rise, then a disproportionate share of the increased burden on occupancy will be borne by renters rather than owners.
As we have written in the past, homestead exemptions not only create economic distortions, but they also erode political barriers to property tax increases. When these taxes are neutral and homeowners are subject to the same property taxes as the owners of other classes of property (or those leasing them), voters are motivated to keep property taxes low. However, when homestead properties are specially treated, they are more likely to favor increases in property taxes that fall, again disproportionately, on commercial and rental properties.
Generally, when well structured, a property tax is both economically efficient and transparent—especially when applied to immovable property like land and buildings. These taxes tend to have a small effect on decisions to work and invest, though they can influence where an individual or business locates.
It would be a bad trade for residents and entrepreneurs alike if the tax structure shifted the burden so greatly that additional, more harmful, taxes were needed to continue to fund property tax relief for homeowners. Such is possible when the policy is unsound. Lowering the property tax is a positive, pro-growth, goal; however, lawmakers should enact reform measures with neutrality in mind. They should favor rate compression for all classes of property over homestead exemptions or other policies that privilege certain types of property. And they should ensure that relief is sustainable and will not obligate the state to increase taxes in other areas (which may be more economically damaging) to afford the local offsets. Texas clearly has the resources to provide meaningful property tax relief. Owners and renters alike must now hope they get it right.
