Who is aided by tax relief plan?
$18B deal contains mix of benefits for homeowners, businesses
Texas Republican leaders on Monday ended months of gridlock over how to distribute roughly $18 billion in property tax relief over the next two years, striking a deal that resolved a key sticking point: how to distribute the savings between businesses and homeowners.
The compromise, brokered behind closed doors by House Speaker Dade Phelan and Lt. Gov. Dan Patrick, both Republicans, resolves an impasse that began more than four months ago and extended into two overtime special sessions of the Legislature. The deal spreads tax relief between homeowners and commercial property across the state, with a focus on small business owners.
Lawmakers are expected to send the new tax package later this week to Gov. Greg Abbott, who has said he will sign it — the last step before voters will be asked to approve the plan in the November election.
In the meantime, here are answers to a few key questions:
The $18 billion deal contains a mix of benefits for homeowners and businesses, both of whom would see direct relief from the biggest part of the package: driving down school tax rates and using more than $12 billion in state funds to backfill the revenue.
Another $5.3 billion would go toward raising the school homestead exemption — the amount that homeowners can trim off the taxable value of their principal residence for school property taxes — from $40,000 to $100,000.
Under the plan, the owner of a $331,000 home — around the statewide average — would save more than $2,500 over the next two years on property taxes for schools, according to state Sen. Paul Bettencourt, the
Houston Republican who has spearheaded the upper chamber’s tax plans. (The exact savings would vary by school district.)
Lawmakers settled on the compromise after Abbott, backed by Phelan and House Republicans, spent much of June championing an approach that would use all $18 billion to drive down school tax rates. Property tax experts say that approach, known as “compression,” would have distributed more benefits to businesses and high-income households than the final compromise, which directly targets homeowners through the homestead exemption hike.
The deal does not provide any direct relief to renters, however. Some conservatives argue that landlords will pass the relief on to tenants if they want to stay in line with the rest of the market.
“In the real business world, everything is so competitive,” said state Rep. Angie Chen Button, R-Richardson, during a Tuesday committee hearing on the tax cut plan. “If one specific landlord decided that they’re not going to pass this kind of benefit through the system and allow renters to get it, you can go to rent another house.”
Democrats have been skeptical of that assumption and had pushed for a cash rebate for renters instead. It didn’t make it into the GOP deal.
The overall plan would shift about 3 percent more of the school property tax burden onto businesses than they currently shoulder, hiking their share to 55 percent, according to Jennifer Rabb, president of the Texas Taxpayers and Research Association, a business-friendly tax policy think tank. Individuals would see their share decline 45 percent, thanks to the homestead exemption — though Rabb noted both groups would receive overall cuts.
State Rep. Shawn Thierry, DHouston, pointed out that Rabb’s analysis did not factor in that more small businesses would be exempt under the plan from paying franchise taxes, saving them a collective $300 million a year, according to state budget officials. Rabb said that would barely register among the $42 billion school property tax burden shared by businesses and individuals.
Patrick and Phelan are each getting a bit of what they pushed for all along. Raising the school homestead exemption delivers on Patrick’s top priority.
Phelan, meanwhile, spent months pressing for tighter limits on property appraisal hikes and more relief for businesses. The plan moves some 67,000 small businesses off the state’s franchise tax rolls and establishes a temporary 20 percent cap on year-to-year appraisal hikes for commercial properties valued at $5 million or less.
Phelan and other House Republicans have argued that businesses — which account for around half of school property taxes in Texas — should receive stronger protections against rising appraisals. There are currently no annual caps on commercial property appraisals in Texas.
For months, Phelan’s push for tighter limits on property appraisal hikes met stiff resistance from Patrick, who argued the changes would distort the market.
In a press release, Patrick and Phelan called the 20 percent appraisal cap a “circuit breaker,” a term that typically refers to policies that limit tax bills based on income levels or other criteria, said Lynn Krebs, an economist at the Texas Real Estate Research Center at Texas A&M University.
“That may be a term they’re using, and I’m just speculating, to avoid using the term appraisal cap, because that’s got a lot of negative connotations,” Krebs said.
The savings from the “circuit breaker” program would apply to commercial properties and residential properties that do not have homestead exemptions. Patrick and Phelan said it would be a three-year pilot program.
The deal also allows Abbott to deliver on a key campaign promise of devoting at least half of the state’s massive budget surplus toward property tax relief — a failure that had hung over the Republican governor amid the impasse.
Still, some conservatives argued Abbott had technically come up short on his vow, since more than $5 billion of the relief was used to continue paying for cuts already adopted four years ago.
Democrats celebrated the homestead exemption hike, which they have long supported behind the idea that it reduces the taxable value of all homes by the same amount, leading to a more even spread.