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Ways and Means Committee Examines Property Tax Exemptions

By Tim Brown
CIP Senior Analyst

The House Committee on Ways & Means released its interim report this month. The report tackles a number of issues of interest to county officials. Of particular interest is the committee’s response to the charge “[e]xamine the state's major tax exemptions to determine how the current costs and benefits compare with the original legislative objectives. Make recommendations for adjustments as needed.” While the committee focused most of its attention on state taxes, it did not leave out the local property tax.

Using preliminary 2009 data from the school districts, the committee found partial exemptions of $235.7 billion, not counting totally exempted properties such as churches and state-owned properties. The following table lists the different school district exemptions and their contribution to that total.

Exemptions

Billions ($)

Percent

Residential

$15,000 Homestead

$73.7

31.2%

65+ Freeze Loss

49.8

21.1%

Local Option % Homestead

34.3

14.6%

10% Residential Value Cap

14.8

6.3%

$10,000 65+ Homestead

13.8

5.9%

Local Option 65+ or Disabled

7.2

3.1%

Veteran/ Surviving Spouse Homestead65

3.8

1.6%

Historical Home Designations

0.3

0.1%

Subtotal

$197.7

83.9%

Business

Freeport Exemption

$22.9

9.7%

Pollution Control Exemption66

9.1

3.9%

TX Economic Dev. Act (Chapter 313)

5.1

2.2%

Low Income Housing

0.3

0.1%

Tax Abatements

0.3

0.1%

Solar and Other

0.3

0.1%

Subtotal

$38.0

16.1%

Total

$235.7

100.0%

 

School district property taxes were lowered in 2006 when the state reworked the franchise tax into the more broad based margins tax. As part of the 2006 property tax buy-down, the state agreed to “hold harmless” the school districts by making up the lost property taxes using state revenue. Consequently, school district tax rates were decreased by about one third from a maximum of $1.50 to $1.00 or less, although the Legislature did leave in room for some growth.

In 2009, John O'Brien, director of the Legislative Budget Board, testified before the newly created House Select Committee on Fiscal Stability saying the taxes that were supposed to pay for the property tax buy-down were producing less revenue than expected, resulting in a $4.6 billion annual gap in school finance.

However, districts were frozen at their 2006 funding level — an increase in property values benefits the state, not the school districts. This raises the question: would the Legislature reduce or eliminate other school district property tax exemptions in order to bump up local tax levies which would, in turn, reduce the state’s financial obligations to those schools?

By 2010, around 300 school districts had reached the maximum tax rate of $1.17 for operations and maintenance. An estimated 60 percent of school districts will dip into reserves to meet operating expenses in 2011. This point is important since there is already talk about lawsuits against the state for what is allegedly becoming a de facto statewide property tax, which is not allowed under the Texas Constitution.

However, if taxed at a tax rate of only $1.00 per $100 of taxable value, $235.7 billion in property could generate $2.357 billion in school district property taxes per year. That amount is equal to 10.8 percent of the $21.78 billion in property taxes levied by school districts in 2009.

Of course, the percentage is subject to change. The Comptroller predicted a decline of 1.97 percent in property values for 2010 followed by a 3.47 percent decline in 2011. Property values are expected to increase in 2012, but only by 0.69 percent.

Declining property values combined with little or no room to increase property tax rates will naturally result in reduced tax levies. If a property tax increase decreases the state’s financial obligation under the hold harmless provisions of the school property tax buy down, then a reduction in property tax levies must increase the state’s financial obligation to the schools. Such an increase given the current financial environment would only exacerbate the state’s financial problems.

Why do counties care about school district funding? Eliminating or reducing school district property tax exemptions could reduce the state’s financial headaches, thus giving it less reason to directly or indirectly pass down costs to counties and other local government entities.

It should be noted that the committee made no recommendations about the individual property tax exemptions in this charge; it simply summarized the exemptions.

If you have any questions or comments about this article, please contact Tim Brown at or call (800) 456-5974.

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iRobert T. Garrett, “State tax swap isn't even, with $5 billion shortfall,” The Dallas Morning News, March 25, 2010.  Available online at: http://www.dallasnews.com/news/politics/texas-legislature/headlines/20100325-State-tax-swap-isn-t-even-1263.ece
iiIbid.
iiiJenny Lacoste-Caputo and Gary Scharrer, “New crisis in school funding,” San Antonio Express-News, August 4, 2010.  Available online at: http://www.mysanantonio.com/default/article/New-crisis-in-school-funding-779245.php
ivTexas Comptroller of Public Accounts, Annual Property Tax Report : Tax Year 2009, January 2011. Available online at: http://www.window.state.tx.us/taxinfo/proptax/annual09/
vTexas Comptroller of Public Accounts, Letter to Gov. Rick Perry, Lt. Gov. David Dewhurst and Speaker of the House Joseph R. Straus, III dated October 1, 2010. 28 Jan 2011