Homeowners across Texas are combatting rapidly rising property tax bills that put their budgets and continued homeownership at risk. For the past few years, property valuations have risen sharply due to increased demand and hot real estate markets driving up prices—even for homeowners who never put their homes on the market. With economic uncertainty and rising inflation, budgets are tighter than ever, and residents are increasingly concerned about their ability to pay property taxes and manage other living costs.
In March 2023, the Texas Senate approved several provisions to provide tax relief and lower homeowners’ property obligations. Let’s take a look at the legislation and the impacts it could have if passed in November this year.
A Quick Overview of the Mechanics of Property Taxes in Texas
Unlike most other states, Texas does not have a state income tax. Instead, local counties and cities receive significant budget funding through localized property taxes. Look at your property tax bill from last year. You’ll see the total amount broken down into separate levies such as school district taxes, city taxes, county taxes, and even taxes for junior or community colleges.
Tax authorities that oversee areas with high-value properties can gather more tax revenue and, therefore, spend more money. As budgets go up (from new development projects, inflation, etc.), local tax districts must increase the revenue they garner through property taxes. When this happens, they do so by increasing the property tax rates. There are limits to the amount local governments can increase property tax rates. In 2019, for example, the Texas legislature passed a provision mandating that local voters approve annual tax rate rises above 3.5%.
While this effectively “caps” the property tax levies, there aren’t as many protections for property tax increases due to increasing property values. This year, Harris County (home to Houston, Texas) is expected to see an increased average property value rate of 15.7%. While those numbers are preliminary, that’s a significant jump in valuations and property tax bills.
An important note: Many homeowners may qualify for a homestead exemption that caps property valuation increases at 10%. This means that the increase in non-eligible property owners sees may be significantly higher. The cap also doesn’t protect landlords or tenants who ultimately cover the increased tax bill.
With all these different variables and tax levers in mind, what can the legislature do to prevent a crisis over property tax payments for 2023 and beyond?
Provisions the Texas Legislature Has Put in Place to Help Lower Property Taxes
Senate Bill 3 is a vital component of the recent $16.5 billion package passed by the Texas Senate. Its express purpose is to provide property tax relief for homeowners, addressing the continuing spike in property valuations and tax bills. Through various mechanisms, Senate Bill 3 would increase exemptions, reduce caps, and help local county and city governments find alternative means of resolving their budgets.
For Homeowners Who Qualify for Exemptions
A homestead exemption is one of the most significant protections regarding property taxes. This mechanism has been in place for decades: if you own a home in Texas and it is your primary residence, you can apply for a homestead exemption, which offers two key benefits:
- It exempts—or takes out of the property tax equation—a certain amount of your home’s value to calculate school district taxes.
- It caps the potential increase of your property tax valuation by 10% (less any changes in value due to improvements you made to the property).
In 2022, the size of the exemption will grow from $25,000 to $40,000. This current legislation will change the general homestead exemption to $70,000. But what does that look like for a homeowner paying their taxes?
Related: 7 Key Things You Should Know About Homeowner Taxes in Texas
Suppose the property tax rate in your area is 1.6% (the previously measured average effective rate), and the school district portion of that tax is 1%. If your home is valued at $300,000, then your property bill with no exemptions applied would be $4,800.
Under the current rules, with a $40,000 exemption, your bill falls to $4,400 (because you receive a $40,000 reduction for calculating that 1% school district tax). Under the proposed measure, it would fall even further to $4,100. That’s $700 in savings from no exemption at all and a savings of $300 over today’s current numbers. Potential savings grow even higher for properties with higher valuations and counties with higher property tax rates.
For Homeowners Over 65 Years
Under the current provisions, residents who qualify for an over-65 exemption get even more benefits than general homestead exemption holders. Benefits include:
- An additional exemption amount of $10,000 (for a total of $50,000)
- A tax ceiling on school district property taxes owed: the amount cannot exceed what seniors paid the year they qualified for the over-65 exemption.
- Additional optional exemptions based on the county or tax district of the property
However, the proposed legislation would increase protections, providing qualifying homeowners with an additional $20,000 exemption for a total of $90,000. In this scenario, that $300,000 home would warrant a tax bill of $3,900. Compare that to a tax bill of $4,800 with no exemption or $4,300 under the current provisions (with a $40,000+$10,000 exemption). This is a sizeable saving for seniors, which can be incredibly important for this demographic. Retired seniors on a fixed income struggle with increased property taxes and rising inflation; this protects seniors and can make tax payments more predictable.
Considering Working Directly With Local Tax Authorities to Find Alternative Ways of Meeting Budget Demands
Under the passed Senate Bill 4, a separate bill within this package, the state government would cover approximately $5.38 billion (or more) for public schools. This policy action would significantly impact individuals’ property tax bills, as school tax levies are often the biggest levy homeowners see. Direct policy actions under this bill include:
Distributing $5.38 Billion of Surplus State Money to County and City School Districts
Currently, the Texas government has a surplus of budget primarily due to increased economic activity and interest in Texas. Under this provision, the state government would apportion significant parts of its excess to funding education. This can help bridge the gap between local government budgets, significantly affected by the passed property tax exemptions, and the forecasted expenses.
Reducing the School District Levy by 7 Cents per $100 of Property
On the flip side of the coin for the above measure, however, local governments would be required to reduce school district taxes by seven cents per one hundred dollars of a property’s value.
Related: Understanding the 10% Homestead Exemption Cap
This measure is critical, as the school district tax levy alone makes up approximately half the total effective tax rate for many Texans. Legislators are bringing down the property tax bill by lowering the tax rate.
The Long-Term Ramifications
While Senate Bill 4—the portion of the tax package focused on school district taxes—will play a significant role in reducing property tax bills across the state, it does have some potential ramifications that have legislators on edge. These consequences could include the following:
- Increasing the Sales Tax in Future Years With a Lower State Surplus: The Texas state government currently has a surplus that can cover the gap in education budgets. But there isn’t a guarantee enough money will always be available. Once that money is gone, legislators may have to pass an increase in the sales tax rate as an alternative revenue source.
- Reducing Robin Hood Recapture Program Redistributions: Under the state’s recapture program for surplus taxes, districts give extra money to the state, which then apportions it to so-called “property-poor” districts that need additional funding. Because Senate Bill 4 would curtail revenue collection, there would be lower Robin Hood payments.
- No Increase of State-Based Monetary Allotments Per Student: When school funding becomes tight, there may not be room for increasing the per-student allotment districts collect from the state.
While some state officials are uneasy about the potential effects in the future, there was fairly universal support in the Senate for all of the measures to address the current crisis.
What Happens Next for the Package?
This package, comprised of Senate Bills 3, 4, and 5, has passed a significant hurdle: all three were passed by the Texas Senate in March 2023. However, big hurdles remain in enacting the bills. First, the Senate Finance Committee must approve the accounts. It will also be put to the vote on the November 2023 ballot. The final step, in which Governor Abbott signs the bill into law, is virtually assured should it reach his desk.
Homeowners Can Also Take Action to Lower Their Property Texas—Protest Your Property Valuation!
While we wait for the outcome regarding Senate Bills 3, 4, and 5 near the end of the year, there are still some things homeowners across the state can do to ensure they’re paying the lowest possible tax bill. One strategy is protesting your property taxes if you believe the valuation is too high or your exemptions aren’t adequately accounted for. At Home Tax Shield, we can navigate the property tax protest process on your behalf by filing the form, gathering evidence to support your case, and managing the hearing process. Sign up today to get started.