Lawmakers targeting ‘loophole’ in property tax relief
This fiscal year was the first real test of a new law limiting large Texas cities and counties to 3.5 percent annual budget increases as the state Legislature tries to tamp down spiraling property tax bills.
The majority of local governments seem to have made that revenue cap work, according to data from the Texas comptroller’s office, informal surveys and a review of news clips by Hearst Newspapers.
But at least 45 local governments, the city of Houston included, either went over 3.5 percent or considered doing so by using an escape clause written into the legislation that allows a return to the previous maximum of 8 percent during a state disaster. Higher tax increases are possible, but would require voter approval.
Senate Bill 2, which passed in 2019, offers some examples of what does and doesn’t count as a disaster — a tornado, hurricane, flood, wildfire or “other calamity,” but not a drought — but the list does not include a pandemic. Now, two co-authors of the bill
say that was a mistake and a loophole they intend to close this legislative session.
“It was never intended that we’d be in a 254-county pandemic,” state Sen. Paul Bettencourt, R-Houston, said. “When you look at the property tax code, that’s much more like a drought, which is exempt.”
Bettencourt and state Rep. Dustin Burrows, R-Lubbock, have not filed the legislation yet, but Burrows has mentioned the possibility of a “COVID-19 penalty.”
“If we have cities and counties somehow get away with jacking property taxes way, way up during this time, this 2020 cycle … we should probably come back in 2021 and 2022 and force a lower rate to penalize them for having done that,” Burrows said on KFYO’s “Chad Hasty” show in June.
Dallas was among the earliest cities to consider — then quickly bat down — a resolution to set its voter approval rate at the 8 percent cap; Fort Bend County in July did the same.
Those that approved of the higher ceiling often did not make full use of it. The Brazoria County city of Manvel, for example, home to about 12,000 residents, did so but ultimately approved a tax rate that produced revenue growth of about 4 percent.
A similar situation unfolded in the small Gulf Coast city of Rockport, where Hurricane Harvey made landfall in 2017, and the final tax rate represented about 4 percent growth.
Warnings from lawmakers
In an interim report released in November, the Senate Committee on Property Tax, chaired by Bettencourt, recommended that the loophole be closed. The House Committee on Ways and Means recommended the same in a report released last month.
The disaster clause became widely known in mid-March when the Texas Municipal League, which represents cities’ interests at the Legislature, informed its members that they had the option to use the 8 percent voter approval rate if they wanted. Executive Director Bennett Sandlin said the group did not take a position on the matter; its goal was to let cities know they had the option.
Gov. Greg Abbott and Lt. Gov. Dan Patrick made their opposition clear in the following months as cities and counties were preparing to pass their budgets. Patrick, during a telephone town hall meeting in April, said local governments raising rates amid the pandemic “would be the worst thing that can possibly happen,” and Abbott told Dallas’ WFAA that he disagreed with the municipal league’s interpretation of the law.
Most large Texas cities, including San Antonio, Dallas, Fort Worth and El Paso, did not exceed the 3.5 percent cap when setting their rates.
Smaller cities with a population under 30,000 are subject to a different cap calculated with a state-prescribed formula, though they may still be required to hold an election depending on the rate they approve.
Sandlin said he was not surprised most cities ultimately decided not to exercise the right to use the exemption “because cities are sensitive to their residents’ pain points, and during a pandemic is not the time to do massive increases in property taxes for sure.”
Houston has its own cap
Officials in Houston argued that the city’s own tax cap, in place since 2004, set it apart from others without one. The cap limits the annual growth of property tax revenue to the combined rates of inflation and population growth, or 4.5 percent, whichever is lower.
Back in 2019, local officials lobbied unsuccessfully for a carveout in SB 2 for a city like Houston with a pre-existing cap.
To avoid hitting its own cap, the city has had to decrease its rate seven out of the last eight years. In that time, the rate has dropped about eight cents.
This year, the city dropped its tax rate again and allowed for revenue growth above the 3.5 percent cap but under the 8 percent cap. The cut represented about $10 in property tax on a $200,000 home with a standard homestead exemption, though that homeowner would have paid $35 less if the city had stuck to the 3.5 percent cap.
But Bill Kelly, the city’s director of intergovernmental relations, said that would have been untenable after years of lowering the tax rate.
“SB 2 was about limiting growth,” Kelly said. “It was never designed to work in concert with Houston’s own revenue cap. As applied, the 3.5 percent (cap) would have cut revenue by $38 million last fiscal year. That’s not what SB2 was intended to do.”
“We’re happy to sit down with (former) Chairman Burrows and show this was not an abuse of that system but instead something that allows us to basically have the same revenue,” Kelly said.