Glenn Hegar
Texas Comptroller of Public Accounts
Glenn Hegar
Texas Comptroller of Public Accounts
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Glenn Hegar
Texas Comptroller of Public Accounts
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FiscalNotes

A Review of the Texas Economy

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Translation:

Property Tax Cuts as Large as Texas Unprecedented Revenues Lead to Historic Property Tax Legislation

By Moise Julot, Sidney Pryor, Brandon Vasquez Published December 2023

Unprecedented state revenues allowed Texas lawmakers this year to propose reducing school property taxes by billions of dollars to help ease some of the burden on property owners through increased exemptions, reductions in school district tax rates and limitations on appraised values for certain properties. It was an arduous journey, with lawmakers tackling the issue in the regular legislative session and in two of the special called sessions in 2023.

Property taxes accounted for slightly over half of the total tax revenue (PDF) for local and state government in 2021 and slightly under half in 2022 (Exhibit 1). This fall, with the passage of Proposition 4, Texas voters elected to put some money back into property owners’ pockets.

Exhibit 1: TAX REVENUE BY SOURCE, 2021-2022

Type of Tax 2021 Tax Amount Percent of Total Tax 2022 Tax Amount Percent of Total Tax
Local Property Tax $73.5 50.6% $79.4 47.0%
State Sales Tax $36.0 24.8% $43.0 25.5%
Local Sales Taxes $10.4 7.1% $12.2 7.2%
Other State Taxes $25.5 17.5% $34.2 20.3%
TOTAL TAXES $145.4 100.00% $168.8 100.0%

Source: Texas Comptroller of Public Accounts


Investing in Public Programs

Texas does not have a state property tax (commonly referred to as ad valorem tax). Nor does the state set appraised values, adopt property tax rates or collect property tax revenues. The Texas Constitution and statutes authorize local governments to collect the tax. Property taxes are a key source of revenue for local taxing units: cities, counties, school districts and special purpose districts. According to self-reported data from appraisal districts, in 2022, school districts levied more than 55 percent of all property taxes levied by local taxing units in the state. Along with schools, property taxes help to pay for essential public needs such as city streets, county roads, police, fire and EMS, among many other vital programs.

Property taxes and the Texas public school finance system are inextricably linked. Funding for Texas public schools comes from a mix of local school district property taxes, state funds and federal funds. For the 2023 fiscal year, the Texas Legislative Budget Board projected local revenue would account for nearly 49 percent of total public education revenue, followed by state revenue (accounting for 38 percent), federal revenue (8 percent) and recapture funds (5 percent).

A school district’s property tax rate is composed of a maintenance and operations (M&O) tax rate and an interest and sinking (I&S) tax rate. The I&S rate is used to repay bonds that fund capital improvements in a school district. The revenue generated by the M&O tax has two components: Tier 1 covers the local share of the basic entitlement funding, while enrichment funding is provided under Tier 2, commonly referred to as “golden pennies.” Since 2019, the growth of Tier 1 local school district M&O property tax revenue has been generally limited to 2.5 percent per year; however, a school district can opt to increase its Tier 2 rate with voter approval, up to certain limits.

Each year, the school district reports estimated property value growth for that year to the Texas Education Agency (TEA), and TEA uses those data (or statewide property value growth, whichever is greater) to compute the M&O tax rate that limits the growth of Tier 1 revenue to 2.5 percent. This is called the maximum compressed tax rate. Because a school district must contribute its local share to pull down state funds to cover the cost of its entitlement, as local revenues increase, the amount of state funds needed to fully fund the district entitlement decreases.

What is Recapture?

Recapture arose in response to years of litigation related to equitable state and local funding for the school system. Districts that exceed a particular threshold of property wealth (calculated on a per-student basis) must make payments into the state’s Foundation School Program that are then used to provide funds to other districts.

One of the major reforms from House Bill 3 in 2019 was allowing recapture districts to keep enough local revenue to cover the formula funding to which the students in the district are entitled. Under prior law, some recapture districts were not able to keep enough funds to meet the full formula funding for their students.

Why Property Taxes are High in Texas

Under the Texas Constitution, all property is taxed in proportion to its value. Appraisal districts in each county are a key component of the system; they determine the value of all taxable property within the boundaries of the county each year.

Unlike many other states, Texas does not levy an income tax, so it must generate revenue from other sources, primarily sales tax. According to the Tax Foundation, a research think tank that examines U.S. tax policies, Texas ranked sixth highest among all states in 2020 for effective property tax rate (Exhibit 2). Effective tax rate in this context is the average amount of residential property taxes actually paid, expressed as a percentage of home value.

Exhibit 2: EFFECTIVE PROPERTY TAX RATES AS A PERCENTAGE OF HOME VALUE, 2020

Rank State Effective Rate
1 New Jersey 2.21%
2 Illinois 2.05%
3 New Hampshire 1.96%
4 Vermont 1.82%
5 Connecticut 1.76%
6 Texas 1.66%
7 Wisconsin 1.63%
8 Nebraska 1.61%
9 Ohio 1.58%
10 Iowa 1.50%

Source: Tax Foundation


Although Texas has a relatively high effective property tax rate, in calendar year 2022, the state ranked sixth-lowest regarding total effective state and local tax burden (the sum of all state and local taxes paid by a state’s resident divided by that state’s share of net national product), according to Tax Foundation data. This is partly due to Texas’ lack of a personal income tax.

Notable School Property Tax-Related Legislation, 2015-2021

Examples of some of the steps Texas lawmakers have taken to address school district property taxes in prior years include:

2015

The residence homestead exemption for school districts taxes was increased from $15,000 to $25,000. Homeowners with over-age-65 tax limitations received an adjustment to account for the increase.

2019

School district M&O tax rates were compressed by 10 cents, and a mechanism was put in place to require ongoing school district tax rate compression to limit the growth of school district property tax revenue to 2.5 percent per year.

2021

The residence homestead exemption for school district taxes was increased from $25,000 to $40,000.

Homebuyers were allowed to immediately qualify for a homestead exemption; previously they had to wait until Jan. 1 of the year after they purchased a home to qualify.

The tax limitation for an individual aged 65 or older or disabled was adjusted to account for reductions in school district tax rates due to compression for tax year 2019 and subsequent tax years.

Relief for Texas Property Owners

With Texas voters’ approval of Proposition 4 on the Nov. 7 ballot, taxpayers’ 2023 property tax bills, as outlined in Senate Bill (SB) 2, will be based on the value adjusted for:

  • An increase in the residence homestead exemption for school districts from $40,000 to $100,000.
  • Compressed school district tax rates by an additional $0.107 for the 2023-2024 tax year.
  • An adjustment to the tax limitation (commonly called a tax ceiling or tax freeze) for an individual who is aged 65 or older or disabled related to the increase in the residence homestead from $25,000 to $40,000 and from $40,000 to $100,000, as well as ongoing adjustments based on any future increase in the residence homestead exemption.
  • A temporary three-year “circuit breaker” limitation on the appraised value of real property, other than residence homesteads or property subject to special appraisal, of 20 percent of the appraised value of the property in the prior year plus the value attributable to new improvements.

With approval from voters, it is likely that Texas will improve its ranking among states regarding effective property tax rates and state and local tax burdens. Research economist Lynn Krebs with the Texas Real Estate Research Center at Texas A&M University says of the property tax relief, “I expect that the property tax reductions from rate compression and larger homestead exemptions will improve Texas’ standing among the states’ relative property tax burdens of homeowners.” Speaking about the potential savings to a homeowner, Krebs says, “Total potential savings depends on home value and exemptions applied. However, for a typical homestead valued at say $350,000, total savings should be about $1,000.” Roughly half of that estimated savings will be fixed (the same) for all homesteads at or above $100,000 in value thanks to the increase in the homestead exemption, according to Krebs. He notes, “This is based on what your taxes would be this year without the legislation versus what it would be with the approved proposition (not last year’s bill versus this year’s bill, which also depends on value changes and other rate changes).”

Adjustments to the residence homestead exemption amount have been a go-to tax relief measure for state leaders. In 1947, the same year state property taxes for general revenue purposes were repealed, property owners could receive a residence homestead exemption for county taxes in the amount of $3,000. In 1978, the general residence homestead exemption for school district property taxes was introduced in the amount of $5,000 (nearly $24,000 in 2023 dollars). With the passage of Proposition 4, the school district residence homestead exemption increased to $100,000. To put it into perspective, a property appraised at $340,000 with the $100,000 school district residence homestead exemption will effectively be paying its school district’s tax rate for only 70.6 percent of its appraised value ($240,000). Since school district taxes generally represent the largest portion of a property tax bill, this residence homestead exemption increase translates into significant savings for property owners, as illustrated in a hypothetical example using median sales prices for homes sold in Texas (Exhibit 3).

Exhibit 3: HISTORICAL SCHOOL DISTRICT PROPERTY TAX HOMESTEAD EXEMPTION AS A PERCENTAGE OF APPRAISED VALUE (HYPOTHETICAL), TEXAS, 1997-2023

Note: Appraised property value is based on median home prices in Texas for given year; September 2023 average price used for 2023 year.
Sources: Texas Comptroller of Public Accounts; Texas A&M University Texas Real Estate Research Center


Property tax bills are generally prepared and sent out in October of each year. SB 2 instructs tax assessors to provide a provisional tax bill that accounts for the increase in the homestead exemption and school district tax rate compression until the canvass of the votes on the constitutional amendment proposed by House Joint Resolution 3, approved by the 88th Legislature, Second Called Session. Taxpayers with questions about their property tax bills are urged to contact their county’s tax assessor-collector.

Property Tax Assistance Division

Although property taxes are levied at the local level, the Comptroller’s Property Tax Assistance Division plays a pivotal role in several facets of the system. Allison Mansfield, assistant director of the division, explains, “One of our primary responsibilities is to conduct the School District Property Value Study, which studies the property values within each school district to determine if property is being appraised at market value as required by statute. The results of the study are utilized in the school funding formulas to ensure the equitable distribution of state funding to school districts.” She says that the division also conducts the Appraisal District Ratio Study, which includes the median level of appraisal within each appraisal district, and is responsible for a variety of other programs, including the Methods and Assistance Program, which reviews appraisal districts’ governance, taxpayer assistance operating procedures and appraisal standards, procedures and methodology; binding arbitration and limited binding arbitration for property value protest appeals; appraisal review board, taxpayer liaison officer and arbitrator training programs; and the provision of technical assistance on property tax matters to the public.

Property Tax Relief is Welcome

Potential savings to property owners comes at a crucial moment when Texans are feeling the weight of inflation-related price increases, rising interest rates and increased housing costs. Directing some of the state’s unprecedented revenues to alleviate some of the property tax burden from property owners will enable more Texas families to divert some of their dollars elsewhere. FN


Learn more about the roles and services offered by the Comptroller’s Property Tax Assistance Division.