Texas’ Proposition 4 would cut property taxes for homeowners, businesses

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Facing some of the highest property taxes in the nation, Texas voters could sign off on a massive tax-cut package in the Nov. 7 constitutional amendment election.

Early voting is under way for the slew of proposed amendments. Proposition 4 would allow the state to spend $18 billion on property tax cuts for homeowners and businesses, cut school districts’ tax rates and enact other tax changes.

Whether Texas can afford those tax cuts in the long term remains unanswered. Lawmakers tapped a record $33 billion surplus this year, fueled by the state’s robust economic growth and federal COVID-19 relief money, to cover an increase in the state’s contribution to public schools, a shared cost between the state and school districts.

Republican tax-cut warriors have heralded the tax-cut package, which gained bipartisan support in both chambers of the Texas Legislature, as unprecedented tax relief for homeowners and business owners. Public education advocates, meanwhile, warn that the proposal could imperil public school funding and lead to future school budget cuts. And renters would see no direct tax relief should the constitutional amendment pass.

The entire property tax-cut package is $18 billion altogether, but it includes $5.3 billion in cuts lawmakers approved in prior years. If voters approve the constitutional amendment, the state would send $12.7 billion to school districts so they could pay for new cuts to their property tax collections, which make up the bulk of landowners’ property tax bills. Of that, $5.6 billion will go toward more than doubling Texas’ main tax break for homeowners — the state’s homestead exemption on school district taxes, or the chunk of a home’s value that can’t be taxed to pay for public schools. The constitutional amendment would raise the exemption from $40,000 to $100,000.

The rest of that money — some $7.1 billion — will go toward paying school districts to lower their tax rates by replacing local property tax dollars with state sales tax revenue, a tax-cut method lawmakers refer to as “compression.” Doing that would lower the tax rate school districts use to pay for operating costs, like teacher salaries, by 10.7 cents per every $100 of property value.

Together, those measures will translate to major tax savings for Texas homeowners, proponents argue.

Had the ballot measure been in place last year, the owner of a home appraised at the state’s median sales price — $340,000 — paying the average school tax rate would have spent about $940 less on their property tax bill, according to a Texas Tribune analysis. That comes out to a little less than $80 a month.

State Sen. Paul Bettencourt, a Houston-area Republican and Lt. Gov. Dan Patrick’s chief lieutenant on property taxes, said homeowners can expect bigger savings in the next few years. The typical Texas homeowner could see more than $2,500 in tax savings the first two years, according to figures provided by his office.

“It’s their money coming back to them,” Bettencourt said. “That’s what should happen when the government has a surplus.”

Cutting Texans’ property taxes was a top priority this year for Republican lawmakers, who pledged to use a record state surplus to deliver relief to taxpayers. After months of GOP infighting over how to achieve those cuts, state lawmakers sent Gov. Greg Abbott a $12.7 billion tax-cut proposal in July. Abbott signed the proposal into law, but voters have the final say in whether to cut their own taxes.

Public education advocates worry that, in the event of an economic downturn, sales tax dollars would dry up — leading to budget cuts at the state level and leaving school districts in the lurch.

“That’s going to put our schools on a pogo stick that’s going to jump up and down with the economy and have no stability,” said Chandra Villanueva, director of policy and advocacy at the left-leaning Every Texan.

Republican lawmakers are betting that the state’s massive economic growth will allow them to maintain the cuts for the time being. Texas Comptroller Glenn Hegar recently projected that Texas would avoid a recession and have an $18 billion surplus when lawmakers return to Austin in January 2025.

“I’m quite confident that for the foreseeable future, we’ll be fine,” Bettencourt said.

But Bettencourt acknowledged that lawmakers would have to revisit the cuts if the Texas economy takes a turn for the worse — though the boost in the homestead exemption would have to remain, given that it would be written into the state’s constitution.

Beyond explicit tax cuts, the package includes other tax reforms.

For the first time, some businesses will see a limit on how much their appraised property values, a key factor in the equation of how property tax bills get calculated, can grow each year. Homeowners already benefit from a 10% cap on how much their taxable home value can grow each year. But businesses currently don’t have such a cap.

The new cap would apply to commercial, mineral and residential properties that don’t receive a homestead exemption — like rental homes and apartment buildings — that are appraised at less than $5 million. Should voters greenlight the proposition, appraisal districts could not raise the taxable value of those properties by more than 20% each year for the next three years. The cap would expire in 2026 unless lawmakers and voters decide to extend it.

Tax policy experts have doubted the effectiveness of such a cap. Property values surged in 2022 amid the state’s exploding population and job growth, according to figures provided by the comptroller’s office. But outside of 2022, that kind of value growth wasn’t typical for most types of properties, even as Texas boomed over the past decade. Owners of commercial properties in 2022 saw the market value of their holdings grow by 15% on average — short of the 20% cap.

If those property owners saw their values hit the 20% limit each year, local governments and school districts could just raise their tax rate to make up for revenue lost to lower property appraisals, said Lynn Krebs, a research economist at the Texas Real Estate Research Center at Texas A&M University — resulting in higher tax rates for all property owners.

“We tend to look at it just on face value and say, ‘Hey, we’re not going to make you pay tax on more than a 20% increase, isn’t that wonderful?’” Krebs said. “What does that mean in reality for everybody else? It means that they’re going to have to pay more to make up for that loss in revenue. The revenue is going to come from somewhere.”

The proposition would also exempt more businesses from having to pay the state’s franchise tax. If approved, the amendment would also allow voters to handpick three members to serve on their local appraisal district’s board of directors. Currently, people are appointed to those posts.

The tax-cut package before Texas voters notably leaves out a key class of Texas taxpayers: renters.

Renters make up more than one-third of the state’s households and pay one-quarter of the state’s school property taxes through their monthly rent, according to the comptroller’s office. With high rents across the state, tenants spend significantly more of their household income on keeping a roof over their heads than homeowners. Seventeen states and the District of Columbia have tax-cut programs aimed at providing property tax relief to renters, particularly seniors and low-income tenants.

But GOP lawmakers ultimately excluded any direct relief for renters when crafting the tax-cut package before Texas voters. Tax-cut proponents have occasionally argued that renters benefit from tax rate compression because their landlords won’t charge as much in rent if their taxes aren’t as high. Though property taxes make up about 20% of the rent bill, they’re not the only factor in determining rents — which are ultimately determined by the market.

“Legislators, at this point, don’t feel enough pressure yet to provide solutions for renters,” said Ben Martin, research director for Texas Housers, a housing advocacy group for low-income Texans. “Until legislators feel that pressure heat up to provide solutions for renters, it’s not surprising that they’re not going to do anything. But the data is really clear: That’’s where the need is.”

Disclosure: Every Texan and Texas A&M University 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.