The city of Frisco is working with Texas legislators on potential changes to a proposed property tax revenue cap to accommodate fast-growth cities.

The proposal, spelled out in two identical bills filed in the state House and Senate earlier this year, would cap the increase in property tax revenues for cities, counties and school districts at 2.5 percent. It would also require local taxing entities to obtain voter approval if they wanted to collect more than that percentage.

The proposal has drawn criticism from many local governments concerned about providing basic services. It has also attracted strong support from those looking to get a better handle on soaring tax bills. Debate over the proposal is ongoing, and changes are likely as it works its way through both legislative chambers.

Frisco leaders said rather than opposing the bill outright, they want to incorporate language to make it more feasible for growing cities. That is crucial in the case of Frisco, which has been growing steadily for years. In just the past two years, the city has added more than 20,000 residents.

“When you’re growing at 6 percent, absorbing that many people every year, you need to make sure your budget can grow appropriately with all the infrastructure that is needed,” Frisco Mayor Pro Tem Shona Huffman said.

Rep. Jared Patterson, R-Frisco, said his No. 1 priority since being elected in November is to provide property tax reform.

“We’re not limiting the sales tax revenue, and we’re not limiting other sources of revenue that cities receive,” Patterson said. “I’m proud to have a seat at the table to be discussing this bill to make sure we get a meaningful reform but also [that it] doesn’t impact core city services or county services.”

A similar bill was filed in 2017 by the Texas Legislature during a special session, but it failed. That bill proposed a 4 percent cap on property tax revenues.

“We think that 2.5 percent cap is too low; we don’t want any revenue caps,” said Chris Wallace, president and CEO of the North Texas Commission, an organization that advocates for the Dallas-Fort Worth area. “We don’t think that tying the hands of our cities, counties or community college districts into providing the core services that their citizens depend on is the way to go.”

Patterson filed HB 1221, which could expand what cities can spend their sales tax revenue on other than for economic development purposes, such as public safety and infrastructure.

“This would provide [cities] with more flexibility on their funding sources as a result of House Bill 2,” he said.

At a Jan. 31 news conference, Gov. Greg Abbott called the effort to cap the rollback tax rate at 2.5 percent “a testament to the voters of this state. The voters demanded this, and this demonstrates that the Texas Legislature is responsive to the needs of our voters.”

Revenue cap

The law currently allows taxing entities, such as cities and counties, to collect up to 8 percent in additional tax revenue year-over-year without voter approval. If a taxing entity wants to exceed 8 percent, it must get voters’ approval through a rollback election. If voters reject the increase, the entity would have to lower its tax rate so that the revenue collected is capped at what is allowed by state law.

Because property tax revenues are based on appraised values, a city or county could reach the threshold without changing its tax rate if property values are increasing significantly.

In Frisco, the average residential property has increased in value by more than $100,000 over the past five years.

Because of the way school finance is calculated, school districts are currently not limited by the 8 percent increase in property tax revenue. Instead, they have a cap on their tax rate. The maximum tax rate allowed is $1.67 per $100 valuation. Other factors go into calculating the rollback rate for school districts.

“School finance is so complicated, and because a school finance bill hasn’t been filed, we just don’t know what the overall impact would be,” said Dax Gonzales, division director of governmental relations with the Texas Association of School Boards. “But we do know if there are no other measures in place to help school districts, these bills would reduce a district’s ability to generate revenue.”

Gonzales said the bills could also be problematic for school districts because they may force them to spend money on elections every time they want permission to exceed the revenue cap.

Local impact

For Frisco, if the bills were to pass as they are, the city would need to cut its budget in order to make up for the revenue it would not receive from property tax growth, Huffman said. The largest expense in the city’s budget is personnel salaries, which would be the first place to cut, she said.

“You go to the biggest portions of the budget and see where to make cuts,” she said. “I want to make it clear that Frisco will continue to be the incredible community and city that it is, but budget cuts mean budget cuts.”

Huffman also said if the bills were to pass without any changes, the city would have difficulty continuing to offer a homestead exemption.

The city currently offers a homestead exemption of 10 percent, which gives a break to homeowners while allowing the city to collect the full amount of taxes from commercial properties.

Collin County is among the few government entities in Texas to pass a resolution that publicly supports the statewide proposal, according to the Texas Association of Counties. Collin County Judge Chris Hill said during a Feb. 4 commissioners court meeting that with good financial planning, cities and counties can have good services and a low
tax rate.

Denton County has not taken a public position on the bills.

The bills would also affect community college districts. Collin College already has one of the lowest tax rates among community college districts in the state.

“The affordability of a community college education is one of the most powerful economic engines driving the growth we’re experiencing in Texas, and no one wants to put that at risk,” District President Neil Matkin said in an email. “As community colleges are typically a very small part of the overall tax burden, including less than five percent in Collin County, it would not be unreasonable to exempt community colleges from the cap.”

Frisco ISD Chief Financial Officer Kimberly Smith said she does not know what the implications are for the district.

“We’re going to have to see the school finance bill before we can really begin to assess what impact the property tax bills are going to have directly on us,” she said.

The school district shares services with the city of Frisco. If the city’s ability to raise revenue is affected, it could indirectly have an impact on some of those shared services, such as school resource officers, Smith said.

Officials on both sides of the issue agree that state legislators need to first look at the school finance system in order to have meaningful property tax reform.

“If they are able to get some real reform in public school finance, that is where you are going to see the biggest relief in property taxes,”
Huffman said.