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Texas Will Provide Homeowners Tax Relief, But It’ll Cost Them

Aug. 26, 2022, 8:45 AM

On May 7, 2022, Texans voted overwhelmingly in favor of Propositions 1 and 2 to lower their property taxes. These plans will put more of the public school cost burden on the government by increasing the amount homeowners can deduct from the appraised value of their houses, known as the homestead exemption. The propositions will save an average homeowner nearly $200 per year.

Propositions 1 and 2 seem like major bipartisan wins for the state government, but it’s not that simple. Republican senators expect sales taxes to make up for the cost of these new deductions, a regressive solution that could completely offset any benefit for the middle class.

Proposition 1. As a response to rapidly increasing home values, in 2019, lawmakers lowered property tax rates. This law had somewhat of a clerical error, though, not considering elderly or disabled people who has been qualified to cap and freeze their rates. Proposition 1 intends to make up for said error by supplementarily decreasing their rates. Those eligible for the cap and freeze option will still be eligible, but their rates will just freeze again, lower.

Proposition 2. This proposition increases the homestead exemption to $40,000 from $25,000, allowing homeowners to deduct an extra $15,000 from their taxable home value.

Proposition 1, which passed with 87% of the vote, will go into effect at the start of next year. Proposition 2, effective immediately, was a little more contested, garnering 85% of the vote. These bills represent apparent victories for Texas Republicans who wish to maintain their favorability going into a potentially competitive gubernatorial race. They also hope the state’s recent surplus will pay for the short-term costs of losing billions from property taxes, public schools’ primary funding vehicle. It’s a promising plan, but the problem lies with their long-term solution.

Republican Sen. Paul Bettencourt, who wrote the legislation, claims the rest of the expense could be ameliorated by sales taxes. Sales taxes are notoriously regressive, meaning the lowest-income consumers pay the largest percentage of their earnings on the charge. The below chart, with information from “The Complete Real Estate Encyclopedia,” details this point.

In an inflation-torn America, it’s highly unlikely that Republicans would increase the sales tax rate to pay the schools what they require, but some programs aimed at lowering the burden for average families are certainly in danger. Governments or taxing entities can use several tools to assist families with their sales tax bills. They can exempt certain items from sales tax—most popularly groceries, prescription drugs, or utility bills. Governments can also return some cost to a targeted income group in the form of credits. Again, these can be used to offset some of the costs of basic family necessities. Other incentives, like tax holidays or free weekends, can also reduce liabilities. Programs like these are wonderful instruments for creating a progressive, just tax system.

But these programs easily could face severe budget cuts or outright elimination to make up for lost property tax revenue, greatly troubling lower- and middle-income families who will get close to no assistance on their bills. Without these programs, any financial aid these propositions ostensibly hoped to create could be negated.

The following 2021 Texas Comptroller estimates illustrate the burden of sales tax on the lower class as related to income.

Families likely will not face the true cost of these propositions for many years, though, because the aforementioned surplus is actually around $4.4 billion. This is enough to pay for the gap in public school funding for almost five years—that is, unless Republicans pass more legislation for tax cuts. In reality, that $4.4 billion might vanish sooner than expected, leaving Texas and its schools ever more dependent on sales tax revenue. In this case, an average family’s increased sales tax liability might prove to exceed their annual property tax relief.

Conclusion

The most recent Texas constitutional amendments will give homeowners a small break in property taxes—
enough for a family dinner at a fancy restaurant or a co-pay for a doctor’s visit. The austerity policy of the current Texas government has allowed for this tax relief, but lawmakers underestimate the negative effects of their reliance on a regressive sales tax. The elimination or reduction of exemptions and credits not only could nullify the economic gain for average families but also could increase their overall expenses. Even so, expect Republican policymakers to continue eating into the surplus to attract voters in November.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Zach Engelhart is a junior accounting major at Texas A&M Mays School of Business. He is pursuing a five-year Master’s in Tax Planning, and a minor in statistics. Engelhart will take his CPA exam in spring 2025.