What Texas’ Tax Plan Could Mean for CRE

Proposed reforms in the Lone Star State could turn out to be a national model, writes Stephen Grant of Popp Hutcheson PLLC.

Stephen Grant

Changes to property tax law in individual states may harbor ramifications for property tax systems across the country. By understanding those developments, property taxpayers will gain insight into the interplay between tax policy and finance, empowering them to make informed decisions on how best to navigate their respective property tax system.

Texas is one such bellwether state. Its legislature convened in 2023 to discuss, among other things, significant property tax reform. Despite consensus among legislators that property tax relief should be paramount, the 2023 legislative session became a battleground as lawmakers clashed over how to tackle escalating property taxes. How the session ensued and the property tax plan that lawmakers ultimately passed provide a constructive look at what property tax policy decisions are being discussed beyond the Lone Star state, and spotlight legislative trends that may shape property tax policy throughout the country.

Texas’ tax turmoil

From the onset of the legislative session, the Texas Senate and the state House of Representatives presented two competing plans for property tax relief. The Senate plan focused on expanding homestead exemptions to lower the assessed value of primary residences, which would benefit homeowners, especially those with lower incomes. The House plan instead prioritized appraisal caps on all real property. The differences between the Senate and House plans led to a legislative deadlock and prevented the passage of any comprehensive property tax relief legislation during the regular session.

Governor Greg Abbott subsequently called two special sessions providing lawmakers with additional time and focus to address property tax relief. They ultimately agreed upon a property tax relief plan focused on four main areas: appraisal cap “circuit breakers;” lowering of certain tax rates; increased homestead exemptions; and establishing elected positions in some appraisal districts.

Breaking the circuit

The plan provides a three-year pilot program that places a 20 percent appraisal cap, or “circuit breaker,” on non-homestead properties valued at $5 million or less. This appraisal cap applies to residential and commercial property, real and business personal property, and mineral accounts. The provision prohibits Texas appraisal districts from raising the annual taxable value of qualifying properties by more than 20 percent per year over the next three years. Unlike circuit breakers in other states, the Texas program is not based on age or income.

This provision could be particularly impactful for commercial property owners, who can now predict the maximum increase in their property’s assessed value each year. This could aid in budgeting property taxes for upcoming fiscal years and in abating overall property tax increases.

While the appraised value for certain properties may be capped at a 20 percent increase each year, tax rates and tax levies do not share a similar limitation. Since tax rates are left to fluctuate and increase, owners of qualifying properties may not see an overall decrease in tax levy. Commercial property owners should consult a knowledgeable tax advisor to explore the impact this temporary appraisal cap may have on their property.

Rates lowered

Local school district taxes typically comprise the majority of an individual’s tax bill, and Texas will use state funds to lower those tax rates. That action, referred to as “compression,” would reduce school districts’ tax rate for maintenance and operations by 10.7 cents per $100 of a property’s valuation.

The M&O tax covers expenses such as teacher salaries and school facility upkeep. Having the state pay a portion of taxpayers’ M&O tax burden would work directly to reduce property owners’ tax bills.

Bigger exemptions

The new property tax plan will expand Texas’ mandatory homestead exemption to $100,000 for property owners who own the home as their primary residence, up from the current $40,000. A homestead exemption represents the value that a homeowner can subtract from their primary residence’s assessed value to reduce the amount of property tax owed.

Elections required

The fourth tax relief measure applies in counties with a population of 75,000 or more and requires elections to select three members to serve on the appraisal district board of directors in their respective appraisal district. Those elected officials would oversee property tax policies and budgets at the county level.

It is patently clear from the 2023 Texas legislative session that property taxes continue to be a hot button policy item. Even when the corpus of a state’s lawmakers agree that legislative action is necessary to address the issue of rising property taxes, gridlock can ensue on how best to tackle the problem. The Texas property tax plan shows the multitude of property tax reforms that lawmakers can bake into a final package. Further, we can glean from the Texas Legislature’s actions that appraisal caps and homestead exemptions will likely be focal points in any property tax policy debate.  With that in mind, lawmakers should recognize that appraisal caps may not protect taxpayers from increases in a property’s overall tax levy or bring noticeable tax relief.

Recent legislative updates indicate what direction property tax reform may soon take across the nation. Each state has a unique and constantly evolving property tax environment, however, so it is always good to engage knowledgeable tax professionals to help navigate that state’s property tax system and maximize tax-saving opportunities.

Stephen Grant is an attorney at the Austin, Texas, law firm Popp Hutcheson PLLC, the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. The firm devotes its practice to representation of taxpayers in property tax disputes. 

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