Property Taxes in the Upcoming Legislative Session

As you probably know, the 86th legislative session in Texas began last week. While there hasn’t been as much fanfare as there was prior to the 2017 legislative session, there is no doubt that many important issues are on the docket.

One of the main issues – at the top of Governor Abbott’s wish list– is property tax reform (and, relatedly, school finance reform). Because of the rapid ascent in the cost to residential owners in Texas, property taxes and school finance reform are likely to be the dominant issues during this session.

While there are multiple property tax proposals that are sure to be nominated by different legislators, for this post, we will just concentrate on Governor Abbott’s proposal.

Basics of Abbott’s Plan

Governor Abbott’s property tax reform plan is based on one basic premise – that no local municipality will be allowed to increase its total tax revenue more than 2.5% above what it was in the previous year. This amount is determined on a total basis for the local municipality. It does not, therefore, affect any individual accounts.

While Abbott’s plan does address the ultimate goal of regulating property taxes, it fails to give much guidance in how the individual appraisal districts should accomplish this goal.

Abbott’s plan fails to give any guidance as to how the local municipality should ensure that the tax revenue does not increase more than 2.5%. Given, however, that appraisals are dictated by the market value of the property – which can be beyond the control of the local municipality – it is likely that most adjustments will come from decreasing the tax rates.

The plan also fails to give any guidance as to how the local jurisdiction should treat residential versus commercial properties. However, because of the political pressure on the local government, we expect the residential taxes to be the primary beneficiaries if Abbott’s plan passes. As a result, we think that property taxes on commercial properties will continue to increase while property taxes on residential properties may level off in the coming years.

Finally, the plan fails to give any guidance as to how it should be enforced. There is no input as to what would happen if a municipality’s tax revenue increased more than 2.5% for a year. Would that municipality be punished? What would happen to the extra revenue? That is not clear from Abbott’s proposal.

Related Aspects of Abbott’s Plan

If Abbott is successful in capping tax revenue, it is likely that local jurisdictions will have a funding shortfall. As a result, Abbott has other proposals that go along with his cap to make up for this potential revenue shortfall. These include:

  • Prohibit the legislature form imposing unfunded mandates on cities and counties;
  • Improve the transparency of local debt; and
  • Have the state make up for lost shared revenue recapture by individual school districts.

It is unclear what changes will come from this legislative session for property taxes. But one thing is clear – property tax and school funding reform will be on the top of the legislative to-do list. So expect to hear lots of discussions on these topics in the next 140 days.

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