Texas property tax-cut debate boils down to homeowners vs. businesses

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Texans face some of the highest property tax bills in the nation, and the legislative fight among the state’s top Republicans boils down to who should get a bigger tax break: homeowners or businesses.

A monthslong standoff between Lt. Gov. Dan Patrick and House Speaker Dade Phelan over how to dole out $12.3 billion in new tax cuts has dramatically intensified within the last week — with tensions reaching higher levels as Gov. Greg Abbott, who had been silent for months on how state lawmakers should cut property taxes, entered the fray and sided with Phelan.

A lot is on the line. Although Texas has a reputation as a low-tax state, Texans’ property tax bills are the sixth-highest in the country, according to the conservative Tax Foundation. With a massive $32.7 billion surplus at their disposal, Republican lawmakers made big promises this year to throw billions of dollars into property tax relief — with Abbott pledging to use half of the surplus for tax cuts.

But GOP lawmakers at the state capitol remain divided over who should benefit most.

“The big difference is, where do they want to target the relief?” said Lynn Krebs, a research economist at the Texas Real Estate Research Center at Texas A&M University. “Do they want to provide it to all taxpayers — businesses and individuals alike — which would be more like the House plan? Or do they want to give everybody [businesses and individuals] some relief, but target the maximum relief for homeowners — which is the Senate plan?”

The pro-business House plan

Abbott and Phelan back a more business-friendly plan to send all $12.3 billion to school districts so they can lower their tax rates — an idea referred to as tax rate “compression.” That would spread out tax relief across homeowners and business owners, all of whom pay property taxes. The plan, which passed unanimously out of the Texas House on Tuesday, garnered the backing of dozens of business groups including the Texas Association of Business and the Texas Oil & Gas Association.

“It [the House plan] provides more cuts to property tax rates than any other proposal at this time,” Abbott said in a statement after the House vote. “It is supported by the most respected tax think tank in the state, as well as more than 30 homeowner, consumer, and business groups across the state. I look forward to signing it when it reaches my desk.”

The House plan has the backing of apartment, real estate and builders groups, as well as business leaders, who argue that businesses need substantial relief from taxes in order to cover rising costs, pay staff, and keep the economy moving by maintaining affordable services and products.

A more populist Senate plan?

Patrick has balked at the Abbott-Phelan plan, arguing that homeowners need more substantial relief.

He and Senate Republicans have thrown their weight behind a $12.1 billion proposal that, like the House’s, puts money toward lowering school property taxes for everyone, including businesses.

But the Senate uses some of the money to pay for a bump in the state’s homestead exemption, which would lower the amount of a home’s value that can be taxed to pay for public schools. Now, that exemption is worth $40,000. Patrick wants to boost it to $100,000.

Businesses would still see at least some benefit — just not as much as they would under the plan backed by Abbott and Phelan, because the Senate plan takes some of the compression and uses it to target homeowners for additional tax cuts.

But the Patrick plan was dead on arrival in the House, where Phelan refused to bring it up Tuesday — arguing that the Senate proposal did not stick to what Abbott insisted on, which was to provide tax cuts “solely” through compression. Instead, the House passed a compression-only plan that Abbott endorsed and then left town — forcing the Senate to either pass the House plan or face the blame for the Legislature’s second failure to deliver property tax relief this year.

Patrick remains defiant.

“If the House thinks after abandoning the Capitol, and walking out on the special session, the Senate is going to pass their ‘take it or leave it’ property tax bill without a homestead exemption, they are mistaken,” Patrick said in a tweet Wednesday.

How do the plans treat Texas homeowners? 

Homeowners would fare better under the Senate tax plan than the House tax plan, according to a Texas Tribune analysis.

Under the House plan, the owner of a $340,000 home — the typical price of a Texas home last year — paying the state’s average school tax rate would save about $486 a year, or about $41 per month, owing to the lower school tax rate.

Those school tax rates wouldn’t decrease as much under the Senate plan as they would under the House plan. But combined with the Senate’s boost in the homestead exemption, that same homeowner would save about $925 a year — about $77 per month — if the Senate plan were to pass.

But not every homeowner would get the same dollar amount because tax rates vary across the state.

The homestead exemption is also considered a more equitable tax benefit than compression. With a homestead exemption, every homeowner gets the same benefit regardless of wealth or home value. That’s true of the state’s current $40,000 exemption, according to a February report from the Texas comptroller’s office.

But wealthier homeowners would see greater dollar savings under either plan than lower-income ones simply because their homes are worth more and they pay more taxes in pure dollar terms. Homeowners up and down the income ladder would see greater savings under the Senate plan than under the House plan, owing to the homestead exemption. But poorer households — at least those who own their homes — would get a bigger break as a percentage under the Senate plan because they pay a higher percentage of their income on property taxes.

“If they are going to do it [cut property taxes], the homestead exemption does a better job of reducing taxes for whom taxes are the most difficult to bear,” said Dick Lavine, senior fiscal analyst at the left-leaning Every Texan. The nonprofit has argued that cutting property taxes is a poor use of the state’s surplus, which could instead go to an increase in the state’s basic allotment — or the base amount the state gives schools per student, which hasn’t increased since 2019.

Unclear is how renters would benefit from either proposal — if at all. Tax-cut proponents generally argue that renters, who are more likely to be lower-income residents and people of color than are homeowners, benefit from property tax cuts because it would benefit commercial property owners and landlords enough that savings would be passed on to tenants.

Renters — who pay 25% of the state’s school property taxes, according to the comptroller’s office — can’t claim homestead exemptions. Landlords say property taxes make up a substantial chunk of a rent bill.

But there’s skepticism, generally, that landlords already strapped on overhead costs and operating in a market with high demand for rental units would pass on the savings from tax cuts to their tenants.

On top of that, the compression idea championed by the House and Abbott is risky for the state’s public schools, experts said. Public education advocates have long called on the state to boost its share of school spending — an idea Republican tax-cut writers have co-opted as a method of cutting public school taxes, which make up the bulk of a property owner’s tax bill.

But if the state faces an economic downturn and ensuing budget cuts to public schools, school districts will be left on the hook for the difference in funding. Looming among some observers is the specter of the $5.4 billion in cuts to public schools in 2011, spurred in part by the Great Recession that began in 2007 and ended in 2009.

“They’ve obviously done the math where they feel confident that they can maintain their support for the foreseeable future, but obviously no one really knows what the economy will look like four, five, six, seven years down the road,” Krebs said. “But I think they’re operating in good faith.”

Disclosure: Every Texan, Texas A&M University, the Texas Association of Business, the Texas comptroller of public accounts and the Texas Oil & Gas Association have been financial supporters of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune’s journalism. Find a complete list of them here.

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