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Quoting State of Texas: Budget plans leave billions of available funds on the table:

In his inauguration speech, Abbott touted Texas’ pro-business stance and unveiled some plans for the state’s largest budget surplus in Texas history.

“We will use that budget surplus to provide the largest property tax cut in the Texas history,” he said Tuesday.

I personally live in Texas, and my property taxes go to the city I live in, the county I live in, a local community college, a local independent school district, a road fund, and the local water control and improvement district. The state of Texas doesn't take any of that, so it's not clear to me what they mean when they say they're going to use the budget surplus to cut property taxes. The state doesn't take property taxes from me to begin with. It seems like all they'd be doing by raising the homestead exemption is reducing the budget of local municipalities.

In fact, according to the Texas Comptroller of Public Accounts , the state of Texas gets the bulk of its money from sales tax, franchise tax, motor vehicle taxes, etc. - not property taxes.

It seems to me that this is just pandering and hot air. Is my analysis correct or am I missing something?

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  • The Texas comptroller makes it clear there is no state property tax". What you're looking for is "compressed tax rates" in which the state and local governments share the cost of things like schools. I can't explain it.
    – Schwern
    Jan 22, 2023 at 2:58
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    I don't think this is a good fit for Skeptics.SE. For one, by the time we have answers, the budget will be released. Secondly, it seems like it will be impossible to provide empirical support for a new policy that has just been announced. This needs economic modelling rather than digging up evidence.
    – Oddthinking
    Jan 22, 2023 at 3:06
  • This seems like something that we can't answer until the cuts actually happen.
    – Joe W
    Jan 22, 2023 at 15:44
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    Since the OP has reverted a change that made the question at least somewhat answerable, I am joining the VTC crowd. Jan 22, 2023 at 18:29
  • Aside from what @Oddthinking said, "who is paying for X" is often just not well defined, due to the fungibility of money. Jan 23, 2023 at 0:18

2 Answers 2

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Who would really be paying for the proposed property tax cuts that the state of Texas is considering?

Texas taxpayers, via the state of Texas, but more evenly than they would have otherwise.

tl;dr: Texas has a complex system of cost sharing between state and local governments which attempts to smooth out changes in property taxes between districts with rising and falling property values. The idea is to keep a rapidly growing district's property taxes from skyrocketing, and a rapidly shrinking district from over-taxing. By making up the difference using state money, the cost of these local changes is shared throughout the whole state.

That's the best I can figure out.

Property taxes in Texas.

From the Texas Comptroller's Property Tax Basics...

Property taxes provide the largest source of money that local governments use to pay for schools, streets, roads, police, fire protection and many other services. Texas law establishes the process followed by local officials in determining the property's value, ensuring that values are equal and uniform, setting tax rates and collecting taxes.

Texas has no state property tax. [emphasis theirs] The Texas Constitution and statutory law authorizes local governments to collect the tax. The state does not set tax rates, collect taxes or settle disputes between you and your local governments.

Given that, I think the real questions are...

  • If Texas has no state property tax, how can the state claim to be lowering property taxes?
  • If Texas lowers its property taxes, how will they fund their "schools, streets, roads, police, fire protection and many other services"?

How is the state lowering local property taxes?

The state of Texas has a lot of limits on how local governments can set their property taxes. In this case it appears they're proposing to raise the "homestead exception" from $40,000 to $70,000. The Texas Comptroller explains...

You may apply for homestead exemptions on your principal residence. Homestead exemptions remove part of your home's value from taxation, so they lower your taxes.

For example, your home is appraised at $300,000, and you qualify for a $40,000 exemption (this is the amount mandated for school districts), you will pay school taxes on the home as if it was worth only $260,000. Taxing units have the option to offer an additional exemption of up to 20 percent of the total value.

There are several types of exemptions you may receive.

School taxes: All residence homestead owners are allowed a $40,000 residence homestead exemption from their home's value for school taxes.

County taxes: If a county collects a special tax for farm-to-market roads or flood control, a residence homestead is allowed to receive a $3,000 exemption for this tax. If the county grants an optional exemption for homeowners age 65 or older or disabled, the owners will receive only the local-option exemption.

...and so on.

How will local governments pay for things?

If there's less property value to tax, won't this lead to less revenue for local governments? How will they pay for things?

tl;dr: The state helps pay the difference. They're using the state budget surplus to help pay for local governments. Local governments lower their property taxes, the state makes up the funding shortfall.

This is all way over my head, but it seems to boil down to...

  1. The state decides how much local funding is needed
  2. If there is a shortfall in local tax collection, the state makes up the difference.
  3. If there is a surplus in local tax collection, the state "recaptures" the difference.

The best document I've found to explain all this is the Texas Education Agency's presentation "HB 3 in 30: Tax Compression Part 2, Setting Your District's 2020 M&O Tax Rate". Here's some relevant slides.

enter image description here

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The intent seems to be to smooth out increases in property tax increases in rapidly growing districts, and overtaxing in others.

Districts which grow faster than the statewide average growth rate will benefit from having their tax rates compressed further so that the district’s local tax collections only increase by 2.5% year over year.

("Collections Growth", the grey bar, is how much that district may increase or decrease property taxes)

enter image description here

HB 3 heavily revised how property taxes in Texas worked in 2019. The following is from the Fiscal Note on HB3...

The bill would reduce recapture paid by local school districts by an estimated $3.5 billion in the upcoming biennium. The bill would have the effect of compressing local maintenance and operations property tax rates, and would reduce local property tax collections by a total of $2.7 billion in the 2020-21 biennium. This decrease in local maintenance and operations property tax collections would be partially offset by an increase in state aid related to the compression of local maintenance and operations tax rates. In subsequent years, ongoing tax compression would continue to decrease tax revenue collections.

Under the provisions of the bill, additional state aid would be provided to school districts and charter schools relative to current law for fiscal years 2020 and 2021. Districts whose entitlement would be less under the provisions of the bill as compared to current law would be eligible for a formula transition grant through fiscal year 2024. To the extent that districts incurred additional costs detailed below, increases in entitlement could be used to offset any potential costs.

The bill would result in local school district and charter school costs for both retirement and health benefits provided by TRS. The additional state aid provided to districts and charters is assumed to cover these costs, through the teacher incentive allotment or other increases in Foundation School Program entitlement.

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  • "and so on ..." indeed. You forgot about city property taxes, community college district property taxes, municipal utility district (MUD) property taxes, and so on. It's amazing how a state that purportedly has low tax rates (Texas has no state personal income tax) can tax other things at such high rates. Texas is in fact tied with Arizona as the sixth highest tax state in the country for low income families. Jan 26, 2023 at 11:38
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It's in the article to which you linked. While Texas does not have a state property tax, it does have state laws that affect how local governments (counties, cities, school districts, etc.) can tax property. One of those laws is the homestead exemption. From the linked article,

"In the budget that we will release this week, the Texas Senate will raise your homestead exemption to $70,000, which will save you thousands of dollars over the lifetime of your home, enough to make a difference!” said Patrick, receiving applause from the audience outside the Capitol.

Whether that increase in the homestead exemption will force local governments that receive much, if not all of their revenues from property taxes to raise their rates remains to be determined.

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    I suspect (but cannot prove) that what will happen is that local tax districts will raise their 2023 property tax rates to offset the losses from the homestead exemption increase. The payment of those 2023 property taxes will be due in 2024. As rental house owners, apartment owners, and business property owners do not receive the Texas homestead exemption, this might still result in a property tax cut for individual property owners who use the property as their primary residence. Renters will suffer, as will businesses. Jan 22, 2023 at 14:09
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    The question you answered is not the one I asked. If you look at the edit history for my post, my question was "Who would really be paying for the proposed tax cuts that the state of Texas is considering?". It was edited by another user to "Will Texas's proposed 2023 budget lower property taxes?". I'm going to edit the title back but I cannot guarantee that it won't be re-edited to the question I didn't ask
    – user38290
    Jan 22, 2023 at 14:17
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    @neubert I answered the question as edited by Jonathan Reez. That was a good edit as it made this an answerable question. The question as originally asked and now as edited back to the original is unanswerable, at least for now. Local tax districts have many months to deal with the increase in the homestead exemption. Jan 22, 2023 at 14:32
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    @neubert You live in TX, as do I. As such, you should be aware of the many conflicts between state and local governments in TX. The conservative state government tends not like the left-leaning cities and counties in the state and does everything it can to punish those left-leaning cities and counties. Raising the homestead exemption has no impact on the state budget. It's a zero cost item as far as the state is concerned. However, it does potentially benefit individual home owners, and those are people who tend to vote Republican. Jan 22, 2023 at 14:43
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    The missing piece appears to be "tax compression". I'm struggling to understand it, but it appears to be a cost sharing measure between state and local governments over the cost of schools and M&O (maintenance and operations). I think the idea here is the state will make up local shortfalls due to restricting local property taxes.
    – Schwern
    Jan 22, 2023 at 20:13