Update: Property tax cuts hit the fast track as Texas Senate advances long-awaited agreement

Construction in the Teravista neighborhood in Georgetown on May 18, 2016. Credit: Shelby Knowles for The Texas Tribune

A key portion of an $18 billion legislative package to cut land-owning Texans’ property taxes received unanimous approval in the Texas Senate on Wednesday, moving the long-awaited compromise deal along a fast track to the governor’s desk after months of agonizing negotiations among the state’s top Republicans.

The House is expected to vote on the legislation Thursday.

The agreement, which was announced Monday, would lower taxes for the state’s 5.7 million homeowners and add a temporary cap on appraisal increases for some non-homesteaded properties.

It would also cut franchise taxes for small businesses and send billions of dollars to school districts so they can cut their taxes for all property owners and shift a portion of their operations costs to the state. However, the package would give no new funding to schools.

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On Wednesday, the Senate approved Senate Bill 2, the property tax cuts bill, and Senate Bill 3, a franchise tax relief bill.

Lt. Gov. Dan Patrick asked senators to rise from their desks after their vote, saying they had been “standing for Texas taxpayers” throughout the negotiations process.

“This is a historic moment,” he said.

A day earlier, the House Ways and Means Committee unanimously approved similar legislation: House Bill 2 and House Bill 3, as well as House Joint Resolution 2, the constitutional amendment required to enact the cuts.

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“This is historic, this is big, and we all worked together to make this happen,” said state Rep. Morgan Meyer, R-University Park, who chairs the committee.

The Senate will vote on the constitutional amendment Thursday. The House is expected to vote on the entire package the same day.

“I want to tell you the joy I feel,” said Sen. Paul Bettencourt, a Houston Republican, the bill author and a lead negotiator. “That’s what we do in Texas, is come up with Texas-sized solutions to Texas-sized challenges.”

The package could land on Gov. Greg Abbott’s desk by the end of the week. Abbott has said he plans to approve it. Voters must pass the plan in a constitutional election in November for it to take effect in the 2023 tax year.

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Democrats in both chambers have raised concerns about the package’s lack of targeted relief for renters or more money for schools but ultimately voted for the bill.

“This is one of the biggest bills we’ll ever pass, and this is something that all of us here have wanted to do for a long time,” said Rep. Richard Raymond, D-Laredo. “It is a big deal. There is no bill that is perfect, but this one is pretty damn good.”

Austin Democratic Sen. Sarah Eckhardt lauded the bill Wednesday as a “balanced approach” to needed relief but said it doesn’t add any additional money for the public school system that property taxes fund. She noted that while it shifts some of that funding responsibility away from property owners to the state, she hopes that the state will not ultimately shirk its responsibility to fully fund schools if the state finds itself more cash-strapped in the future.

“I vote for this in hopes that the state continues, even after this one-time surplus, to pay its fair share with regard to public education so that we don’t go back to a past where we allow the local property taxes to increase so that we could fail to meet our obligation,” she said.

The deal marked the end of a stalemate among the state’s top Republicans that lasted nearly seven months as they butted heads over how to dole out more than $12 billion in new tax breaks budgeted by lawmakers earlier this year.

Including $5.3 billion approved four years ago, the legislation allocates a total of $12.6 billion to reduce the school property tax rate by 10.7 cents per $100 valuation for homeowners and business properties.

It also includes an increase to the state’s homestead exemption from $40,000 to $100,000 at an estimated cost of $5.3 billion, and some extra relief for seniors and property owners with disabilities, averaging about $170 more per year.

Bettencourt said the deal would save the average homeowner about 41.5% on property taxes each year, or an average of about $1,300 per year.

Another part of the plan would institute a three-year, 20% cap on appraisal increases for commercial and non-homesteaded properties valued at $5 million or below — a number that could be adjusted by the comptroller with inflation each year.

“This will provide stability for small- and medium-sized businesses that struggled with double and triple digit increases the last few years,” Meyer said in Tuesday’s hearing.

Leaders referred to that part of the bill on Monday as a “circuit breaker” program, but it’s somewhat of a misnomer. Unlike programs in other parts of the country with the same name, the Texas proposal does not calculate property taxes based on a person’s income or ability to pay, nor does it specifically seek to benefit lower-income taxpayers.

The plan shifts the school-tax burden by about three percentage points toward businesses, raising the share of the school property taxes paid by businesses from 52% to 55%, while homeowners’ shares drop from 48% to 44.8%, said Jennifer Raab, president of the business-backed Texas Taxpayers and Research Association.

“At the same time, everybody’s getting a tax cut so I’m not here to look a gift horse in the mouth,” Raab said. “But I do think it’s important for you to understand that this shift is occurring. Texas businesses already pay a high property tax or rather tax burden overall relative to other states.”

Targeted tax relief for the state’s 3.7 million renter households has been left out of proposals that have passed either chamber, and it is not in the final compromise. House Democrats last week unveiled their own tax-cut package that would give tenants a cash refund equaling up to 10% of the rent they paid the previous year.

Republicans and some tax policy experts argue that renters will benefit from the compression portion of the tax-cut package because landlords won’t pass as much in property taxes onto their tenants — thus resulting in smaller rent increases. But others say demand for the state’s red-hot rental market and a dearth of supply to meet that demand, not property taxes, have driven rent increases in recent years.

State Rep. Angie Chen Button, a Richardson Republican and committee member, said she’d been getting a lot of phone calls from constituents asking whether renters would benefit from this package at all. The answer to that, she said, is the competitive market: If a landlord doesn’t want to pass along the savings to the renters, she said, “you can go and rent another house.”

“They’re not getting [the benefit] directly but because the person who rents out the house is getting this benefit, it should flow through this entire system,” Button said. “In the real business market, everything is competitive.”

This article originally appeared in The Texas Tribune.