Last month, the Texas legislature considered two bills geared toward relieving Texans’ property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. burden: Senate Bill 2 and House Joint Resolution 3 (companion legislation to Senate Joint Resolution 76). Both chambers approved SB 2, a 3.5 percent limit on increases for property taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. levies, but the bill is currently in conference as the two chambers resolve a set of House amendments. Legislators chose not to act on HJR 3, a property and sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. swap proposal. While this legislation was intended to address constituents’ concerns about their property taxes, state and local tax swaps are difficult to do well for a number of reasons.
As an enabling constitutional amendment without parallel legislation, HJ 3 failed to describe what method the government would use to distribute the revenue. But more than that, the joint resolution put nothing in place that would keep localities from inching back toward their previous rates. Granted, SB 2 brings down the limit on levy growth from 8 percent to 3.5 percent. (When the bill was first introduced, it floated a cap of 2.5 percent, but was later amended to set a 3.5 percent cap.) Any increase that exceeds that cap will automatically appear on a ballot for residents to vote on. But property taxes under the swap could still have continued to rise, albeit more slowly, with the newly-instated tax cap in place. Voters may be more likely to approve such property tax increases if their rates have recently fallen thanks to a tax swap.
Even if the higher local rates didn’t reach previous levels, residents could ultimately pay more in state and local taxes than they did before the swap, as those small property tax increases would be borne in addition to higher sales taxes.
Because Texas forgoes an individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , it relies more heavily on other sources of revenue, and local governments are comparatively more important than they are in many other states. This yields property taxes that are higher than average, a frequent source of complaints in a generally low-tax state, even if they are part of the reason other taxes are low.
By sidelining this proposed constitutional amendment, Texas cleared the path for more meaningful conversations about more effective ways to constrain the growth of property taxes in the future.
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