The Texas Senate and House reached a deal on property tax relief just as CNBC announced the state was no longer on its ranking of the five best to do business. Those matters are connected.
Lt. Gov. Dan Patrick and House Speaker Dade Phelan announced a tax relief plan that they said will deliver the “biggest property tax cut in Texas history.” Since it requires a change to the state constitution, the $18 billion package of policies will go to voters, provided the House and the Senate agree on its final form, and Gov. Greg Abbott signs it. That could happen by the end of the week.
The legislation is a little bit of what the House Republicans wanted, and a little bit of what the Senate Republicans wanted. It comes up short on things that the Progressive Caucus asked for, like relief for renters and an increase in teacher pay.
It does provide relief for homeowners, first in the form of a $100,000 homestead exemption for roughly 5.7 million homeowners statewide. (The current exemption is $40,000.)
It includes a $12 billion expenditure that would pay independent school districts to lower their tax rates. School districts set their own rates and use the revenue to fund everything from teacher salaries to building maintenance.
Another condition is a 20 percent tax break Phelan and Patrick called a “circuit breaker” for commercial and residential properties, as well as properties that do not receive a homestead exemption. The latter, the two said, will be a three-year pilot project designed to address ever-increasing appraised values of properties by capping them temporarily.
Another proposal would exempt businesses from taxes if they owe $1,000 or less, or if they make $2.47 million in taxable revenue or less. The bill will also create elected positions on the boards of appraisal districts.
“This will provide stability for small- and medium-sized businesses that struggled with double and triple digit increases the last few years,” said state Rep. Morgan Meyer (R-Park Cities) in a Tuesday meeting of the House Ways and Means Committee, which voted to approve the three bills in the package.
The school-tax burden will shift from homeowners to businesses by about three percentage points, which equates to a 55 percent share of school property taxes.
It also doesn’t provide any relief for renters, something state Reps. John Bryant (D-Dallas) and Ana-Maria Ramos (D-Richardson) had included in Bryant’s HB 62. Bryant’s tax bill establishes a homestead exemption of $100,000 or 25 percent of the home’s appraised value—whichever is higher—with a cap of $200,000. It also offers a cash rebate of up to 10 percent of the rent paid in the previous year to anyone renting their home. It also implemented a 6-cent reduction in public school property taxes. The bill included a $1,000 increase to the average daily attendance allotment for public schools and indexed the increase to inflation, which created, Bryant and Ramos argued, a permanent $4,300 per year raise for teachers.
“The fact that renters and public schools were entirely left out of the tax relief discussion really bothered me,” Bryant tweeted last week. “So I worked with my colleagues to introduce a real tax relief bill for ALL Texans.”
During the debate Tuesday state Rep. Angie Chen Button (R-Garland) asked Meyer how the relief for non-homesteaded properties would help renters.
“Everyone’s taxes will go down, and so those who own rental homes or others, they will see their tax rate go down and therefore they will be able to pass that on to their renters,” he responded.
Many question that assertion, including state Rep. Gene Wu (D-Houston). “What planet do you live on?” he asked. “You think that a landlord is going to reduce rent, right, because of a small property tax decrease?”
While property taxes are part of the mix, real estate experts say that rents are also based on the demand for housing in any particular market, and what that market will bear. In a recent analysis of demand by the property management software company Yardi and Rentcafe, low supply is a catalyst for rent hikes in many Texas cities. There are roughly nine prospective tenants for every vacant unit in our area, which means vacant units in Dallas sit for about 40 days at most, three days fewer than the national average.
Dallas is only considered moderately competitive, even though more than 93 percent of apartments are occupied.
Texas also does not allow rent control, which means there is little fiscal incentive for landlords to pass those property tax savings on to renters if they can fill their apartment at a higher rate.
The governor has pushed for eliminating property taxes altogether, but faces bipartisan opposition to the idea. The math doesn’t work: property taxes generated more than $73 billion in revenue in 2021, which accounts for more than half of the state’s income. Public education—despite the fact that the state only funds roughly 40 percent of the cost compared to the 60 percent placed on local taxpayers—costs more than $60 billion a year.
When Abbott and Patrick were at loggerheads last month, the lieutenant governor said eliminating property taxes altogether without some form of alternate—and equally revenue-generating—income is “a fantasy.”
“If we eliminated property taxes in the next two years we would spend every dollar in our budget. There would be no funding for public education, no funding for healthcare, no funding for law enforcement,” Patrick said. “If you have no money from property taxes, you have no money left to do anything. This is a joke! (It’s) perpetuated by someone who is not the governor. Someone reeled him into this and he just said it.”
State Sen. Nathan Johnson (D-Dallas) pointed to who that “someone who is not governor” might be last month. “Still don’t understand how Don Huffines is running state policy,” he tweeted. “I beat him 5 1/2 years ago.” Huffines, a former state senator, has been a vocal advocate for the abolition of property taxes.
The governor has indicated that he will sign the compromise package, however, and is likely to call another special session this fall to tackle school funding and teacher pay. That session, he has warned, will require the legislature to pass some form of vouchers to get his signature—something many lawmakers on both sides of the aisle have fought against for years.
All of this—and several other legislative priorities this year—factor into Texas’ fall from the top five of CNBC’s America’s Top States for Businesses. Texas has been in the top five since the ranking was introduced, and was at the top of the list in 2008, 2010, 2012, and 2018. Last year, the state came within six points of dropping off the top five. This year, Texas comes in at No. 6, missing fifth place by five points.
There is a wealth of knowledge regarding what caused that drop. The state finished strong in categories like workforce and access to capital, but fell short in quality of life aspects. The state fell to 24th in Infrastructure, which is the second-most important category in the rankings, CNBC says. It was 15th last year. The network cited the stability questions around the state’s power grid and the $61 billion in repairs needed in the state’s water utilities as big reasons for its fall.
It’s also not the the least expensive place to live, despite Texas touting that there is no state income tax or corporate tax. The state moved from No. 12 to 16 in Cost of Doing Business, and from No. 14 to 22 in Cost of Living.
The Texas Legislature’s failure to increase public school funding this session is punctuated by the fact that the state dropped from 21st in Education last year to 35th this year. Per-pupil spending is among the lowest in the nation, and K-12 test scores are lagging, according to U.S. Department of Education data.
The talk around vouchers—and the governor’s insistence that vouchers or education savings accounts be included in any school funding bill in the next special session—likely means that there may not be a resolution to the funding conundrum. Schools statewide are running deficit budgets this upcoming school year.
“I’m actually going to have to pull money for the first time from the fund balance—for the first time I’m actually presenting a deficit budget,” Dallas ISD superintendent Stephanie Elizalde told D last month. “I can cover that with the fund balance, but never when I worked for (former Dallas ISD superintendent) Michael Hinojosa do I ever remember submitting a deficit budget.”
Elizalde said that the district is somewhat fortunate to have a foundation that acts as a charitable arm to fundraise, and that it had good fiscal stewardship in previous years to retain a fund balance that will allow her to staff schools this year.
“I think about rural communities and I wonder, ‘How are they gonna do it?’” she said.
All of this likely means that Texas won’t be going up in the rankings next year, either. CNBC reporter Scott Cohn pointed out that the state finished last in Life, Health, & Inclusion, dropping from the already abysmal 49th last year. Cohn pointed to low rankings for healthcare and access to primary care physicians, a rise in violent crime. His report also noted that some are leaving Texas after lawmakers banned gender affirming care for transgender children, most abortions, and outlawed diversity, equity, and inclusion offices in state-funded colleges and universities.
Although he once embraced and promoted the state’s higher placement in CNBC’s rankings, this year, Abbott brushed them off, telling Austin station KXAN Tuesday that “people and businesses vote with their feet.” He pointed to the state’s job creation and business-friendly accolades from other sources.
With a constitutional election and at least one more special session to go, time will tell if those feet remain in Texas.
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