Second Called Session Adjourns Sine Die

The 88th Texas Legislature Approves Record Property Tax Reforms, Largest in State History

Highlights:

• The package of bills includes:

  • Senate Bill 2, which details the proposed property tax cuts

  • Senate Bill 3, a franchise tax relief bill

  • House Joint Resolution 2, a constitutional amendment required to authorize the tax cuts

• The plan aims to reduce property taxes by an average of over 40% for nearly 6 million Texas homeowners

• The package also includes a $5.3 billion expansion of the state's school district residence homestead tax exemption - increasing the current amount of $40,000 to $100,000 - providing an estimated average savings of $1,300 per year

• The plan introduces a temporary 20% cap (set to expire in 2026) on appraisal increases for non-homestead properties valued at $5 million or lower

• The legislation also allocates nearly $12.6 billion to reduce the school property tax rate -- reducing the rate by 10.7 cents per $100 valuation

  • New school funding, however, will likely be addressed in a future special session

• Franchise tax relief comes in the form of an exemption doubled in size -- businesses with less than $2.47 million in revenue (currently $1.23) will be cut from the franchise rolls

The average Texas homeowner could see annual property tax savings close to $1,300 if voters approve an increase in the homestead exemption in the upcoming November election. That’s part of the sweeping tax cut package passed by both houses of the Legislature on Thursday, ending a months-long impasse on how to distribute $18 billion in state revenue surplus set aside in this session’s budget. “We have a Texas-sized property tax relief package that is unparalleled in the world,” said bill author and Houston Senator Paul Bettencourt. As in previous versions, the legislation continues the ongoing reduction of local school property tax rates begun in 2019 and doubles the franchise tax exemption, but the final version sent to the governor includes two new significant provisions.

The first provision would answer the House’s demand for a limit to property appraisal growth. Current law caps yearly home value growth to no more than 10 percent of the previous year, but the House passed legislation during the regular session to lower that number to five percent and extend it to all real property. This was one of the major sticking points between the chambers, as Lt. Governor Dan Patrick held that such caps may allow taxing entities to raise rates in a way that they cannot under revenue growth limits passed in Austin in 2019. Ultimately, the chambers agreed on a 20 percent appraisal growth cap for all real properties with a valuation of no more than $5 million. Homeowners would still be under the 10 percent cap set for homesteads. This provision is set to expire in 2026, allowing legislators to gauge the impact of the new caps over the next three years.

The second provision seeks to add more public input into the appraisal process by adding three elected members to the boards of each appraisal district in counties exceeding a population of 75,000.

The third measure in the tax cut package would cut the number of small and medium businesses on the state’s franchise rolls by 40 percent. SB 3, also by Bettencourt, would exempt businesses that bring in less than $2.47 million in annual revenue from the franchise tax, double the current exemption. Bettencourt says that will apply to 67,000 additional businesses in Texas. It also removes a requirement that businesses that owe nothing submit a “no taxes due” form to the state or face a $50 penalty.

Lt. Governor Patrick said this week that face-to-face negotiations between himself and House Speaker Dade Phelan, as well as tireless work by Bettencourt and his House counterpart Representative Will Metcalf resulted in the compromise on this historic tax cut. “When you have $18 billion you don’t decide it in six days, or six weeks, or six months,” Patrick said before adjourning the second called session Thursday. “Of all the different variations of bills that [the House] sent us and we sent [them], this was the best bill of them all.”

Governor Greg Abbott is expected to sign the measures quickly. He released a statement following Thursday’s passage praising the package.

“I made a promise to Texans during my campaign that the State of Texas would use at least $13.5 billion from our historic budget surplus to provide substantial relief to property taxpayers across Texas. Today, we will deliver even more with over $18 billion in property tax cuts. The Texas House and Senate fulfilled our promise with an agreement that delivers a comprehensive, long-lasting solution to increasingly burdensome property tax bills. I thank my partners in the Texas Legislature for coming together to honor the best interests of hardworking Texans who want to own their property—not rent it from the government. I look forward to signing this legislation into law to provide Texans with the largest property tax cut in Texas history.”

While the tax compression, changes to the franchise tax, and most other components of the legislation can be enacted by statute, the homestead exemption requires an amendment to the state constitution. Voters must therefore approve the measure in November before it can take effect, but ballot initiatives to raise the homestead exemption in 2015 and 2022 each passed with more than 85 percent support. The bill is structured such that the cuts will apply to the current taxing year.

The ballot proposal presented to voters at the November 7, 2023, election will read: "The constitutional amendment to authorize the legislature to establish a limit on the maximum appraised value of real property other than a residence homestead for ad valorem tax purposes; to increase the amount of the exemption from ad valorem taxation by a school district applicable to residence homesteads from $40,000 to $100,000; to adjust the amount of the limitation on school district ad valorem taxes imposed on the residence homesteads of the elderly or disabled to reflect increases in certain exemption amounts; to except certain appropriations to pay for ad valorem tax relief from the constitution limitation on the rate of growth of appropriations and authorize the legislation to provide for a four-year-term of office for a member of the board of directors of certain appraisal districts"