Sit-Rep: Vital Issues for the Future of Texas

Story and photos contributed by Rep. Terry Wilson (R-TX20)

Over the last four years one set of issues received more consistent focus from the people of House District 20 than any other: the quality and transparency of public education and the ever-increasing property tax bills Texans are being asked to pay to provide it. As the biennium draws to a close, you deserve a review of what your legislators have done to address these issues, hear what your legislators believe to be the best path forward to substantive property tax relief, and to have an opportunity to give feedback on these and other issues important to you and your family. 

Previously, as chair for the House Appropriations Subcommittee on Article III of the state budget for the 87th session overseeing the process of funding both public and higher education in Texas, I worked with Senator Larry Taylor of Galveston to put $180 million toward building up vocational programs in schools as early as seventh grade.  

These funds, which have remained in place for the 2024-2025 budget, will help schools purchase the necessary equipment and facilities for students to train for in-demand, marketable, and lifelong careers they can start after graduation. Finding a child’s spark is essential to proper education and giving every child the opportunity to discover the trades and skill sets that make them show up every day hungry for knowledge is what Texas public schools were designed for. 

Paying for quality education is never easy, and the property tax system in Texas makes a tough situation much worse by trying to force a square peg in a round hole. Rising property taxes force people out of their homes, and businesses out of existence altogether. 

As the new school year begins and property tax bills have hit kitchen tables across the state, I wanted to provide an overview of how our property tax system works, how it got this way, and some of the proposals on the table for fixing it in the upcoming 89th session. 

Funding Public Schools in Texas

To gain an understanding of the taxes Texans pay to support public education, it is important to begin at the beginning. The Republic of Texas laid out its Declaration of Independence in 1836 and itemized all the things Mexico had done wrong to compel the territory to break away. They listed their grievances in order of importance and first on the list, even before the forcible military dissolution of the State Legislature, was the lack of support and maintenance of a system of free and public schools. Our State Constitution reflects this history by placing two main requirements on the State Legislature regarding public education: 

Sufficiency Requirement

Article 7 Section 1 of the Texas Constitution provides for “knowledge essential to preserving the knowledge and liberty of the people.” In simple terms, public education in Texas is required to be sufficient such that every Texas student is either educated enough to have a job in a productive industry or area immediately after high school, or at the conclusion of their public education program, or is sufficiently prepared to go on to post-secondary, military, vocational, or other training. This is the job of the legislature, before anyone else, to provide a funding for public education and ensure Texans receive a quality education. 

While the Constitution makes clear that the State of Texas is responsible for funding education, the courts have ruled the responsibility could be fulfilled by providing a means for local districts to raise funds themselves, rather than all funding coming directly from state revenues. With the establishment of the ISDs, the burden of paying for education shifted gradually from state support to local property taxes, as they provide consistent revenue with minimal fluctuations during recessions. 

Efficiency Requirement

For example, in Georgetown ISD (GISD), the Maintenance & Operations (M&O) tax is $0.6992 per $100 of home value. Based on the number of homes and home values, the ISD receives $166 million (after recapture) in revenue to pay for actual expenses required by the legislature: building maintenance, salaries, and materials. For FY2024, GISD property taxes will bring in 82 percent of what is needed to meet its full budget.

In Buckholts ISD, the M&O tax rate is close, at $0.6692, but there is not as much land value, so their tax revenue is $360,385; just 17.71 percent of their budget. If the taxpayers in Buckholts were required to fully fund their ISD entirely, they would have to pay $3.77 per $100 to meet their full M&O burden. 

To bridge the gap between the costs of educating students and disparity in property values, ISDs with a surplus of property tax revenue must purchase “recapture” credits from the state. Those credits, along with billions in state revenue, help fund districts whose rates are already at the statewide ceiling and still need additional funds to operate their schools. 

While taxpayers statewide do pay about the same rate under this system, property values and costs have continued to rise, pressuring local property owners but measures passed in the last legislative session have provided considerable relief. The school district property tax rate for GISD was reduced by 18.5 cents. Additionally, a $60,000 increase in the state mandated homestead exemption provided significant tax relief for homeowners.

How property taxes work  

Setting Local Budgets

Texas is one of nine states that does not collect a personal income tax. Instead, local governments charge property taxes to provide local services and pay down debts. Texas does not have a state property tax and instead relies on other taxes, like sales and use tax, to generate state revenue. Each taxing entity determines your property tax bill by applying their adopted property tax rate to the taxable value of your home. Most Georgetown property tax is paid to Williamson County, City of Georgetown, and GISD.

Rates are set, individually, by a governing body or executive committee of those taxing entities, e.g., City Council or MUD Board. Before setting a property tax rate, cities, counties, and school districts must propose a budget, make it available for public inspection, and hold a public hearing. Once they have their budget in place, they set their rate based on the revenue necessary to cover the spending listed in their budget. 

Budgets determine revenues, revenues determine rates, and rates determine your tax bill, so the best thing you can do to lower your property tax bill is get involved in the budgeting process for your local government. Attend their hearings, ask “why” each item is necessary, and get detailed answers. These hearings are often sparsely attended, and your participation is integral to ensuring local budgets match local priorities. 

Determining Your Property Value

Property tax rates are charged as a dollar amount owed per $100 in value of a property. The taxable value is found by looking at the property’s market value, assessed value, and any applicable exemptions.

Market Value

The chief appraiser in each County Appraisal District determines the market value of each property within the county based on its value on January 1 of that year using generally accepted appraisal practices, such as reviewing recent comps. They report those values to the Appraisal District Board of Directors who are selected by taxing districts, with each district’s voting strength determined by their share of the total property tax collected within the county. 

Assessed Value

If your house qualifies for a homestead exemption, then the value of your home on the January 1 after you moved in becomes your initial assessed value. While the market value of the property increases or decreases year to year based on changes in the local housing market, the assessed value acts as a buffer against drastic changes, limiting year to year increases to 10% until the assessed value and the market value are equal. 

If your house was worth $200,000 when you moved in, its year one assessed value is $200,000. If your year two  market value increased to $300,000, your assessed value would only increase 10% to $220,000. In year three, if the market value stayed at $300,000, your assessed value would still increase by 10% to $242,000, since the assessed value had not yet caught up to the market value. 

Taxable Value

The final taxable value is found by taking the assessed value and subtracting exemptions you may have available. Homesteads are eligible for a $100,000 exemption on their taxable value, so our $200,000 house would only have a taxable value of $100,000 as a homestead. This is the value used by the tax assessor/collector to determine your tax liability once the rates have been set. 

2019: Limiting Property Tax Increases

In the 2019 session, the legislature established a new formula to put a cap on how much local governments could increase their annual property tax revenue collections without first having to ask the voters for approval. 

“No New Revenue” Rate

The no-new-revenue rate would provide the taxing entity with approximately the same amount of revenue it received in the previous year on properties it has taxed before. Essentially this is the tax rate that would completely cancel out all increases in property value. If the values have gone up, the “no-new-revenue” rate will go down. If new property has been added, like a home being built on a once empty lot, the additional revenue that home would bring in is not considered in calculating the “no-new-revenue” rate, as it has not been taxed before. Once the taxing entities have charged property tax to a new property, that revenue will be considered in calculating the next year’s “no-new-revenue” rate. 

Voter Approval Tax Rate

The voter-approval tax rate is a level that allows the taxing jurisdiction to collect more taxes than the previous year, allowing local governments to adjust for inflation and increases in population. For cities, counties, and special purpose districts, it is calculated by taking the revenue generated by the “no-new-revenue” tax rate and finding the tax rate that would increase that revenue by 3.5 percent from the previous year. For ISDs the increased collection cannot exceed 2.5 percent. 

If the taxing entity sets a budget that would require setting a tax rate higher than the voter-approval rate to cover the spending, then they must hold an election for the voters to approve or deny the new budget along with the increased taxes. If the voters do not approve the budget, then the tax rate is automatically set to the “no-new-revenue” rate, and the taxing entity must go back and rebuild a budget using only the revenues allowed when charging that rate.  

These changes only apply to the taxes charged for funding the local government’s budget, not to the repayment of bonds and other debt, as those already require voter approval before the debt could be issued.

Under this new process, when the state provides additional funding to schools, ISDs must reduce their property tax rate to keep their overall revenue the same without having to collect as much in property taxes. 

2021: Limiting State Spending

2019’s reforms set very stringent requirements on local government revenue growth, so it was only proper we should also set similarly stringent requirements on the state government. Starting with the 88th Legislative Session in 2023, the State of Texas is now bound by law to spend no more than it did in the previous two-year cycle, with adjustments for population growth and inflation. The government should provide the services required by the people and spend no more than necessary to do so. If more revenue is collected, those funds should be returned to the taxpayers.

2023: Tax Relief and Appraisal Reform

While the Homestead Exemption and taxable value caps help keep the taxable value of your home from increasing too quickly, that limitation forced many school districts to raise the amount of taxes collected from small businesses and other commercial properties. Constitutional requirements for all school M&O tax rates to be within a certain range of one another meant that simply collecting less revenue was not an option for school districts.

The 88th Legislature passed, and voters ratified, a constitutional amendment placing a 20 percent  cap on the year-to-year increase in the appraised value for commercial property, including small businesses. The Homestead Exemption was also increased from $40,000 to $100,000, and $12.8 billion in state revenue was dedicated to buying down Sschool M&O rates across the state, above and beyond the $5 billion previously dedicated in 2021 for the 2023-2025 biennium. 

2025: What’s Next?

For decades, the legislature balanced its books by pushing the cost of providing quality public education onto property taxpayers by way of local school districts. As property tax receipts rose, state lawmakers were able to use sales tax revenues to pay for other priorities, allowing local property owners to pay the bill, and school districts to take the blame. The question at hand, then, is what should the state do with additional revenue if it cannot spend it? The way I see it, we will not truly have a surplus until the local share of school district M&O is zero.  

Option 1: Using surplus state taxes to pay down the property tax share of School District M&O to zero.

Since providing an education for every Texan is a state responsibility, rather than a local one, it is essential that Texas decouple the funding mechanism for schools from local property taxes. In the 3rd Special Session of the 2021 legislature, I supported HB 122. This bill builds on the work from the 2019 session, which reduced property tax rates by between $0.08 and $0.13 per $100 of value across the state from where they would have been otherwise.   

When sales tax revenue exceeds the state’s spending cap, HB122 would have required the state to spend 90 percent of that surplus to buy down the M&O rate for public schools, which would require an amendment to the Texas Constitution. Most property taxpayers pay close to 50 percent of their taxes to schools, so, as the state buys down costs, property tax decreases, with the goal of completely replacing M&O property taxes with state revenue over time. This would take about 20 years using only surplus state revenue. 

Option 2: Removing Sales Tax Exemptions

This option builds on the legislation in Option 1 but includes removing sales tax exemptions to achieve the elimination of M&O property taxes at a faster pace. 

We currently exempt many categories from sales taxes. Some, like essential groceries and raw materials, make complete sense, while others, like boats, do not. If we pass a bill similar to 87(3) HB 122, removing exemptions would produce additional revenue that would help reduce property taxes in less time rather than giving exemptions to special interest groups. 

With the state spending limits and a bill like HB 122 in place, we could trust that the revenue generated by removing sales tax exemptions would go to the intended purpose. It would not require removing all exemptions, but each one we do eliminate gets us close to zero M&O taxes that much faster. 

Eliminating school district M&O property taxes will not only help homeowners, it will also make Texas an even more attractive state for business, industry, and commerce. Instead of having to give sweetheart deals, such as a 10 year exemption from school district property taxes to entice companies to relocate, we can offer every business, new or existing, the benefits once offered only to large corporations like Facebook or Amazon. 

Your input will be essential to making sure we are being fair when considering the impact of these options.