$18 BILLION property tax relief heading to Texas voters
This week, Dr. Lynn Stucky joined fellow lawmakers in Austin to finally pass an $18 billion property tax relief proposal that will now head to Texas voters for final approval. After months of negotiating – and two special sessions – state leaders reached a compromise that will bring a historic cut for hard-working Texans across the state.
The proposal is the combination of three pieces of legislation that, when combined, provide the largest tax cut in Texas history. The two bills and joint resolution authorize several significant tax cuts, including raising the homestead exemption to $100,000, increasing the state’s “buy down” of local school taxes, saving or eliminating the Franchise Tax for small businesses, putting a temporary cap on appraisals for non-homestead properties, and adding accountability by creating new elected positions on local appraisal districts.
To help wade through the policy, here is a look at each bill individually, as well as the joint resolution proposing a constitutional amendment for voters to authorize in November.
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HB 2/SB 2 is a significant property tax relief bill in the Texas Legislature. It proposes several key measures:
• Reducing school district maintenance and operations (M&O) tax rates by 10.7 cents per $100 of taxable value, using surplus state revenue.
• Increasing the homestead exemption from $40,000 to $100,000 for school district property taxes.
• Introducing an appraisal cap for non-homestead properties, limiting the annual growth in appraised value to 20%, except for certain property improvements. This cap would be applicable only for tax years 2024-2026.
• Increasing the number of directors on an appraisal district's board from five to nine for counties with a population of 75,000 or more. Three of the additional directors would be elected by voters, and one would be the county tax assessor-collector.
• Implementing transitional rules and contingencies, including providing taxpayers with a notice on their property tax bills assuming approval of House Joint Resolution 2 (HJR 2). If HJR 2 is not approved, taxpayers would receive a supplemental tax bill.
• House Bill 2's implementation is contingent on the passage of franchise tax relief as outlined in Senate Bill 3. It aims to provide $12.7 billion in property tax relief for the 2024-25 biennium. The bill benefits homeowners, business owners, second property owners, and even renters by reducing property tax bills. It moves Texas closer to the goal of eventually eliminating school district M&O taxes.
• Businesses would also receive a temporary appraisal cap to protect them from significant property tax increases.
The bill addresses the issue of accountability by creating elected positions on an appraisal district's board of directors. Although not all positions are elected, this change improves the law by ensuring voter influence.
House Joint Resolution 2 is crucial to providing the necessary constitutional authority for the implementation of House Bill 2.
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House Bill 3, recently passed by the Texas Legislature, introduces significant changes to the franchise tax system, particularly by increasing the "no tax due" threshold. This analysis aims to provide an overview of the key provisions and potential implications of the bill.
Increased "No Tax Due" Threshold:
One notable provision of House Bill 3 is the substantial increase in the "no tax due" threshold for franchise tax purposes. Under the current law, businesses with revenue not exceeding $1 million (adjusted to $1.23 million due to inflation) in a given tax year are exempt from paying the franchise tax. The bill proposes raising this threshold to $2.47 million, doubling the limit. Consequently, businesses earning less than this amount would be exempt from tax liability and the requirement to file a franchise tax report.
Fiscal Impact:
House Bill 3's fiscal note estimates an ongoing annual cost of $300 million to the Property Tax Relief Fund, ultimately affecting the General Revenue fund. This cost reflects the reduction in franchise tax revenue resulting from the increased "no tax due" threshold. While the bill aims to provide relief to qualifying businesses, it is crucial to consider the financial implications for the state's budget.
Concerns with Franchise Tax:
The franchise tax has been subject to criticism as it applies to businesses regardless of their profitability during a tax year. This approach raises concerns regarding the fairness and efficiency of the tax policy. Over the past decade, several states, including New Jersey, Kentucky, and Michigan, have repealed their gross receipts taxes, recognizing their limitations. Thus, there is a growing consensus that the ultimate goal for the Texas Legislature should be the gradual phase-out of the franchise tax.
Incremental Reform:
Given the current circumstances, completely phasing out the franchise tax may not be immediately attainable. In light of this, the increase in the "no tax due" threshold proposed by House Bill 3 is a welcome reform. By raising the threshold, the bill aims to provide relief to a greater number of businesses and mitigate the burden imposed by the franchise tax.
House Bill 3 introduces significant changes to the franchise tax system in Texas, primarily through the increase in the "no tax due" threshold. While providing relief to qualifying businesses, the bill carries a fiscal cost to the Property Tax Relief Fund. As discussions continue regarding the future of the franchise tax, incremental reforms such as the proposed threshold increase represent steps towards achieving fairer and more effective tax policies.
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House Joint Resolution 2 proposes constitutional amendments in Texas to address property tax relief. If adopted by the Legislature and approved by Texas voters, the resolution would:
• Allow the Legislature to set a cap of 20 percent on the annual growth of non-homestead real property's appraised value.
• Increase the homestead exemption for school district property taxes from $40,000 to $100,000, effective from January 1, 2023.
• Declare that appropriations for property tax relief would not be subject to the "constitutional spending limit." This limit restricts the increase in state tax revenue appropriations to the estimated rate of economic growth.
• Grant the Legislature the authority to establish, through general law, longer terms of up to four years for members of an appraisal district's governing body in counties with a population of 75,000 or more.
Voter approval of HJR 2 is a necessary requirement for the implementation of House Bill 2.
