Texas Legislation Reveals Policy Directions for CRE

Stephen Grant

Changes in property tax law in individual states may have ramifications for property tax systems across the country. By understanding these developments, estate taxpayers will gain insight into the interplay between tax policy and finance, enabling them to make informed decisions about how best to navigate their estate tax system.

Texas is one of these leading states. Its legislature reconvenes in 2023 to discuss, among other things, major property tax reforms. Despite consensus among lawmakers that property tax relief should be paramount, the 2023 legislative session has become a battleground as lawmakers clash over how to address rising property taxes. How that session ensued and the property tax plan ultimately passed by lawmakers provides a constructive look at the property tax policy decisions being debated outside the Lone Star State, and highlights legislative trends that may shape property tax policy across the country.

Tax unrest in Texas

Since the beginning of the legislative session, the Texas Senate and state House of Representatives have introduced two competing property tax relief plans. The Senate plan focused on expanding homestead exemptions to lower the assessed value of primary residences, which would benefit homeowners, especially low-income people. Instead, the House plan prioritized the maximum assessment on all properties. Differences between the Senate and House plans have led to a legislative deadlock and prevented any comprehensive property tax relief legislation from being passed during the regular session.

Gov. Greg Abbott then called two special sessions to provide lawmakers with additional time and focus to address the property tax break. They eventually agreed on a plan to mitigate property taxes that focused on four main areas: assessment caps and “circuit breakers”; Reducing certain tax rates; Increase homestead exemptions; and the creation of elected positions in some evaluation departments.

Break the circle

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

This ruling could have a particular impact on commercial property owners, who can now predict the maximum increase in the assessed value of their property each year. This can help establish the property tax budget for the coming fiscal years and limit overall property tax increases.

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

Interest rates lowered

Local school district taxes typically make up the majority of an individual’s tax bill, and Texas will use state funds to lower these tax rates. The measure, referred to as a “squeeze,” would reduce the tax rate levied on school districts for maintenance and operations by about 10.7 cents for every $100 of property valuation.

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

Greater exemptions

The new property tax plan would 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. The homestead exemption represents the value a homeowner can subtract from the assessed value of his or her primary residence to reduce the amount of property tax due.

Elections are required

The fourth tax exemption measure applies in counties with a population of 75,000 or more and requires an election to select three members to serve on the assessment district board in their assessment district. These elected officials will oversee property tax policies and budgets at the county level.

It is abundantly clear from the 2023 Texas Legislative Session that property taxes continue to be a hot item in politics. Even when state lawmakers agree that legislative action is necessary to address the issue of high property taxes, gridlock can arise over how best to address the problem. The Texas property tax plan shows several property tax reforms that lawmakers could incorporate into a final package. Moreover, we can infer from the actions of the Texas Legislature that assessment caps and homestead exemptions are likely to be focal points in any property tax policy debate. With this in mind, lawmakers should realize that assessment caps may not protect taxpayers from increases in their overall property tax or bring a noticeable tax break.

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

Steven Grant is an attorney at the law firm Popp Hutcheson PLLC in Austin, Texas, and a Texas member of the American Estate Tax Counsel, a national affiliation for Estate Tax Attorneys. The firm devotes its practice to representing taxpayers in property tax disputes.