Two years after the Texas Legislature failed to pass legislation reforming the state’s property tax system, lawmakers have proposed similar bills in the 86th legislative session that would lower the cap on how much taxing entities can increase their property tax revenue from the previous year.
House Bill 2 and Senate Bill 2, known as the Texas Property Tax Reform and Relief Act, filed Jan. 31, would require taxing entities such as cities, counties and school districts to obtain voter approval for an annual property tax revenue increase of more than 2.5 percent from the previous year. Under existing state law, taxing entities can receive up to 8 percent more revenue from the prior year—referred to as the rollback rate—without needing voter approval. This cap does not include new property added to the tax rolls.
“If the local level needs more revenue, all they have to do is go to the public and sell the premise behind why they need to keep more revenue,” said Sen. Brandon Creighton, R-Conroe, who was a joint author of SB2. “If they don’t need more revenue, then they will lower their tax rate to balance the new money coming in.”
Creighton said in addition to property tax reform, the Legislature is focused on making changes to the home appraisal process and how the state funds public education. The three topics are intertwined in decreasing property taxes for homeowners, he said.
“[School finance] is an important and integral part of the discussion,” said Sen. Paul Bettencourt, R-Houston, who co-authored SB2. “Tax rates for the [school districts]must come down too. The only way you can do that is through school finance reform where the state picks up a bigger share.”
Property tax, appraisal reform
Bettencourt said the bill is necessary because homeowners have seen their home appraisal values increase steadily over the past few years, which leads to homeowners paying more in property taxes even when a taxing entity’s rate is unchanged.
According to data from the appraisal districts in Harris and Montgomery counties, average home values in Tomball and Magnolia grew 46 percent and 35 percent, respectively, from 2013-17.
Bettencourt said the amount of property tax revenue being generated by these appraisal increases is not necessary for local entities to operate. According to data from the Texas comptroller, the amount of property tax revenue collected by Harris County increased almost 40 percent between 2013-17 while Montgomery County saw revenue increase nearly 25 percent.
Although the city of Tomball held its tax rate steady at $0.341455 per $100 valuation from 2013-17, the amount of property tax revenue collected grew about 5.4 percent from 2016-17, according to Texas comptroller data. The city of Magnolia increased its tax rate less than $0.01 to $0.4709 per $100 valuation in 2017, but property tax revenue grew 1.8 percent from 2016-17.
“Even if we reduce taxes, sometimes we have a dollar more, but it’s not because we’re increasing taxes, it’s because of growth in the city,” Magnolia City Administrator Paul Mendes said.
Bettencourt said any revenue generated from new properties in a taxing entity’s fiscal year are exempt from this 2.5 percent cap.
MISD Assistant Superintendent of Operations Erich Morris said new property generates one-third to one-half of the district’s annual revenue growth.
“[Taxing entities] get new growth in the current tax year and a few other exemptions,” Bettencourt said. “We’re cranking down on the rollback rate, which has been the same [since 1981], to reflect a much lower inflationary time.”
Public school funding
Some officials said they believe property tax reform will be difficult to achieve without first reforming the state’s school finance system.
“Property tax reform needs to come from school finance reform,” said Bennett Sandlin, executive director of the Texas Municipal League, a nonprofit that advocates for and provides services to Texas cities. “Sixty percent of your tax bill is school taxes, and they are going up dramatically because the state keeps putting up less money [for school funding]. … [Cities are] just 16 percent of the tax bill.”
However, it is unclear how the proposed legislation might affect school districts, Morris said.
“Until we see what the school finance bill looks like and how that might be interrelated with the property tax bill, it’s difficult to have a true guestimate in terms of the overall revenue effects for us,” he said.
TISD Chief Financial Officer Jim Ross said he believes the proposed property tax legislation would not affect TISD operations, as the state has already capped the amount of revenue per student a district can receive. The first dollars in are from local property tax revenue; state funding makes up the remaining share. If property tax revenue is limited, the state must pour more dollars in unless the school funding formula is revised, Ross said.
“We’re capped as far as the maximum revenue per pupil we can receive. If our local taxes were to drop with this restriction, then the state has to make up that difference,” he said.
Over the past few years, the state’s share of public school funding has decreased for Tomball and Magnolia ISDs while the local share from property tax revenue has increased.
In 2011-12, state revenue made up 31 percent and 50 percent of total revenue for Tomball and Magnolia ISDs, respectively, while state funding dropped to about 14 percent and 35 percent, respectively, in 2018-19, Community Impact Newspaper reported.
“The only viable mechanism to give property tax relief and avoid defunding our schools is for the state to take on a heavier burden of the revenue stream,” Morris said.
City, county effects
Some local officials are worried that the property tax reform measure would limit local ability to fund services. The primary source of county revenue is through property taxes.
“If the state passes an arbitrary cap on our growth, they will effectively place an arbitrary cap on the roads we can build and maintain and the law enforcement resources we can fund,” Harris County Judge Lina Hidalgo said in a letter to Bettencourt.
Unlike counties, sales tax revenue funds the largest share of daily city operations—about 53 percent in Tomball and 48 percent in Magnolia, according to FY 2017-18 budgets.
Still, property tax revenue makes up about 12-14 percent of total revenue in Magnolia and about 10 percent of revenue in Tomball, city officials said.
“Anything that ends up reducing our revenue will cause us to have to make tough decisions about where we give and where we take [in the budget],” Tomball City Manager Rob Hauck said.