Texas will offer tax relief to homeowners, but it will cost them

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On May 7, 2022, Texans voted overwhelmingly in favor proposals 1 and 2 to reduce their property taxes. These plans will place more of the burden of public school costs on the government by increasing the amount homeowners can deduct from the appraised value of their homes, known as the Homestead Exemption. The proposals will save the average homeowner nearly $200 per year.

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

Proposal 1. In response to rapidly rising home values, in 2019 lawmakers lowered property tax rates. This law had a sort of clerical error, however, failing to take into account elderly or disabled people who were qualified to cap and freeze their rates. Proposal 1 aims to repair said error by lowering their prices. Those who are eligible for the cap and freeze option will still be eligible, but their rates will be frozen again, lower.

Proposal 2. This proposition increases homestead exemption to $40,000 from $25,000, allowing homeowners to deduct an additional $15,000 from the assessed value of their home.

Proposition 1, which passed with 87% of votes, will come into force early next year. Proposal 2, effective immediately, was a little more contested, obtaining 85% of the vote. These bills represent apparent victories for Republicans in Texas who wish to retain their favor ahead of a potentially competitive gubernatorial race. They also hope that the state’s recent surplus will pay for the short-term costs of losing billions in property taxes, the main vehicle for funding public schools. It’s a promising plan, but the problem lies in their long-term solution.

Republican Senator Paul Bettencourt, who drafted the legislation, says the rest of the spending could be improved by sales taxes. Sales taxes are notoriously regressive, meaning that the lowest income consumers pay the highest percentage of their income on the levy. The table below, with information from “The Complete Real Estate Encyclopedia,” details this point.

In a America torn apart by inflationRepublicans are highly unlikely to raise the sales tax rate to pay schools what they need, but some programs aimed at reducing the burden on average families are certainly in jeopardy. Governments or tax entities can use several tools to help families with their sales tax bills. They may exempt certain items from sales tax, including groceries, prescription drugs, or utility bills. Governments can also reimburse part of the costs 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, such as tax holidays or free weekends, can also reduce liabilities. Programs like these are wonderful tools for creating a progressive and fair tax system.

But these programs could easily face severe budget cuts or outright elimination to make up for the loss of property tax revenue, greatly upsetting low- and middle-income families who would get virtually no help on their bills. Without these programs, any financial assistance these proposals ostensibly hoped to create could be undone.

The according to 2021 Texas Comptroller estimates illustrate the burden of sales tax on the lower class relative to income.

However, families likely won’t be faced with the true cost of these proposals for many years to come, as the aforementioned surplus is actually around $4.4 billion. That’s enough to close the public school funding gap for nearly five years, that is, unless Republicans pass more tax cut laws. In reality, that $4.4 billion could disappear sooner than expected, leaving Texas and its schools even more dependent on sales tax revenue. In this case, an average family’s sales tax increase could prove to be more than its annual property tax relief.

Conclusion

Texas’ latest constitutional amendments will give homeowners a small reduction in property taxes…
enough for a family dinner at a fancy restaurant or a co-payment for a visit to the doctor. The current Texas government’s austerity policies have provided this tax relief, but lawmakers are underestimating the negative effects of their reliance on a regressive sales tax. Eliminating or reducing exemptions and credits could not only negate the economic gain for average families, but could also increase their overall expenses. Even so, expect Republican policymakers to continue snacking on the surplus to lure voters into November.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., 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 degree in tax planning and a minor in statistics. Engelhart will take his CPA exam in the spring of 2025.

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