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The Texas budget surplus, and property taxes


United States Senator Phil Gramm, of Texas, once observed, “Balancing the budget is like going to heaven. Everybody wants to get there but nobody wants to do what you must to get there.” In the state of Texas, legislators are constitutionally required to pass a balanced budget. However, as the legislature only meets every two years, they budget two years at a time (known as a biennium). In 2021, the Texas Legislature passed a budget projecting state revenue for the upcoming biennium to be approximately $119 billion. As it turns out, the estimated state revenue for that biennium is $150 billion, leaving the state of Texas with a $30 billion budget surplus (actual figure is $32.7 billion, at last estimation).

The discussion then becomes how to use the budget surplus. There is no mandate requiring the state of Texas to employ a budget surplus in any specific manner. Both Republicans and Democrats agree property tax relief needed to be addressed with a substantial percentage of this budget surplus. The challenge has been shaping the legislation. Governor Greg Abbott, supported by the House of Representatives, has been in favor of tax compression. Essentially, tax compression is buying down the school district tax rates, exclusively. Lieutenant Governor Dan Patrick, supported by the Senate, has indicated there must also be an increase in the residential homestead exemption for the legislation to pass the Senate.

The 88th Legislative Regular Session ended on May 29, 2023, without progress. As a result, a first special session convened in June, which also ended without progress. Subsequently, a second special session was convened, where we now find ourselves. On July 10th, Texas Lieutenant Governor Dan Patrick and Speaker of the House of Dan Phelan issued a joint statement outlining the plan to use $18 billion of the budget surplus on legislation that will deliver the largest property tax cut in the state of Texas.

The resolution is legislation that buys down both the independent school district tax rates and increases the residential homestead exemption. Both the Senate and the House of Representatives passed bills on Wednesday, July 12, and Thursday, July 13, respectively, outlining the details of the property tax cut. $12.6 billion will be allocated to buy down the independent school district tax rates 10.7 cents per $100 valuation for homeowners and business properties. For non-homestead and commercial properties, this legislation would create a 20% cap on appraisal increases for properties valued at less than $5 million. The cap would extend for the next three years but grants the Texas Comptroller ability to adjust the cap congruent with inflation. $5.4 billion will be allocated to increase the residential homestead exemption from $40,000 to $100,000. Additionally, the line for a small business’s obligation to pay franchise taxes doubled from $1.24 million to $2.47 million. There will also be newly created elected positions on the local appraisal boards in counties with populations over 75,000. The state of Texas estimates an average homeowner to save 40% overall on their annual property taxes.

The legislation will be presented to Governor Greg Abbott for signature today, Friday, July 14. Once he signs it will be up to the voters of the State of Texas. The bill would appear as a constitutional election on the upcoming November ballot. Similar bills that have appeared for Texas voters’ approval passed overwhelmingly (over 80% in both recent instances). The intent of Texas legislators is for the property tax cuts to affect the 2023 taxes, if passed by voters in November.

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