Tax Relief and the Texas Lege

As the 86th Session of the Texas Legislature rolls along, we have made it to bill filing deadline. Tax relief was one of the key focus areas laid out by Governor Abbott, Lieutenant Governor Patrick and Speaker Bonnen. There have been multiple proposals put out there, but which one would actually make the most difference for Texans?

Let’s start by stating unequivocally that House Bill (HB) 2 and Senate Bill (SB) 2, which mirror each other, are not tax relief. Taxpayers won’t see their taxes go down as a result of capping the year over year revenue at 2.5% for school districts, cities and counties. Those bills might slow down how much your taxes go up (emphasis on might), but you won’t get any tax savings. All those bills will do is choke off the services your community can provide its citizens. Not tax relief, so we will move on.

Prior to the rollout of HB3, the Texas House Democrats proposed a plan to double the Homestead Exemption to provide tax relief to homeowners via HB4352. The current Homestead Exemption is set at $25,000, and if you are elderly or disabled, you can claim an additional $10,000. As currently designed, the Homestead Exemption reduces the taxable value of your primary residence. For example, if your home is valued at $250,000, the Homestead Exemption would lower the amount your taxes are calculated against to $225,000. The plan proposed by the Democrats would raise the level of the Exemption to $50,000. This would be available to every Texas homeowner.

When the House rolled out HB3, the tax relief component was centered around a compression of the tax rate, where school districts would lower their maintenance and operations (M&O) rate by $0.04. For the taxpayer, this means if your school tax rate had been $1.08 per $100 of valuation on your home, it would now be $1.04 per $100 of valuation. The legislation would force districts to maintain the $0.04 for at least a year, but it could then start to rise again. There is another element in HB3 relating to golden and copper pennies that could increase the initial tax savings slightly, but as it will impact different districts differently, I’m going to steer clear and focus on the consistent elements.

Right at the bill filing deadline, SB5 was released by the Senate. This bill would increase the Homestead Exemption by $10,000, from $25,000 to $35,000. This is aligned with the House Democrats plan, just at a lower amount.

There are three plans, HB3, SB5, and HB4352, but how can you tell which one makes the most difference? I ran scenarios, comparing the plans, carrying the tax relief out 5 years. Since Texas caps home valuation increases at 10% per year, I used that as a worst case to derive total savings. For the tax rate leveraged, I went to the Texas Education Agency and pulled the school tax rate averages from across 1,018 districts. The result was a rate of $1.30. Now we can have a conversation about tax relief, as it’s representative of our communities. Let’s talk real numbers.

$250,000

If I own a home worth $250,000 and I have a current Homestead Exemption on it, I am taxed on $225,000. At our $1.30 tax rate, I would be paying $2,925 in taxes.

  • Under HB3, my tax rate would drop to $1.26 on my $225,000 property valuation. This means my taxes would total $2,835, tax relief of $90 vs my current taxes. Over 5 years, with 10% valuation increases, my tax relief would total $560.
  • Under SB5, my Homestead Exemption increases to $35,000, reducing my taxable value to $215,000, and my rate stays at $1.30. This means my taxes would total $2,795, tax relief of $130 vs my current taxes. Over 5 years, with 10% valuation increases, my tax relief would total $650.
  • Under HB4352, my Homestead Exemption increases to $50,000, reducing my taxable value to $200,000, and my rate stays at $1.30. This means my taxes would total $2,600, tax relief of $325 vs my current taxes. Over 5 years, with 10% valuation increases, my tax relief would total $1,625.

For a homeowner with a $250,000 home, the clear advantage, in year one all the way through year 5 is the HB4352, doubling the Homestead Exemption.

$500,000

If I own a home worth $500,000 and I have a current Homestead Exemption on it, I am taxed on $475,000. At our $1.30 tax rate, I would be paying $6,175 in taxes.

  • Under HB3, my tax rate would drop to $1.26 on my $475,000 property valuation. This means my taxes would total $5,985, tax relief of $190 vs my current taxes. Over 5 years, with 10% valuation increases, my tax relief would total $1,171.
  • Under SB5, my Homestead Exemption increases to $35,000, reducing my taxable value to $465,000, and my rate stays at $1.30. This means my taxes would total $6,045, tax relief of $130 vs my current taxes. Over 5 years, with 10% valuation increases, my tax relief would total $650.
  • Under HB4352, my Homestead Exemption increases to $50,000, reducing my taxable value to $450,000, and my rate stays at $1.30. This means my taxes would total $5,850, tax relief of $325 vs my current taxes. Over 5 years, with 10% valuation increases, my tax relief would total $1,625.

For a homeowner with a $500,000 home, the advantage, in year one all the way through year 5 is HB4352, doubling the Homestead Exemption. HB3 does start to close the tax relief gap, but over 5 years is still $500 behind. SB5 is well behind the other two plans.

$750,000

If I own a home worth $750,000 and I have a current Homestead Exemption on it, I am taxed on $725,000. At our $1.30 tax rate, I would be paying $9,425 in taxes.

  • Under HB3, my tax rate would drop to $1.26 on my $725,000 property valuation. This means my taxes would total $9,135, tax relief of $290 vs my current taxes. Over 5 years, with 10% valuation increases, my tax relief would total $1,781.
  • Under SB5, my Homestead Exemption increases to $35,000, reducing my taxable value to $715,000, and my rate stays at $1.30. This means my taxes would total $9,295, tax relief of $130 vs my current taxes. Over 5 years, with 10% valuation increases, my tax relief would total $650.
  • Under HB4352, my Homestead Exemption increases to $50,000, reducing my taxable value to $700,000, and my rate stays at $1.30. This means my taxes would total $9,100, tax relief of $325 vs my current taxes. Over 5 years, with 10% valuation increases, my tax relief would total $1,625.

For a homeowner with a $750,000 home, the advantage, in year one and year two, is HB4352. In years 3 through 5, due to the increase in home valuation, HB3 becomes advantaged. This is with a HUGE caveat. This assumes that the school district doesn’t raise their tax rate, beginning to take back some of the $0.04 of compression. For a homeowner with a $750,000 home, SB5 is far in the rearview mirror.

$1,000,000

If I own a home worth $1,000,000 and I have a current Homestead Exemption on it, I am taxed on $975,000. At our $1.30 tax rate, I would be paying $12,675 in taxes.

  • Under HB3, my tax rate would drop to $1.26 on my $975,000 property valuation. This means my taxes would total $12,285, tax relief of $390 vs my current taxes. Over 5 years, with 10% valuation increases, my tax relief would total $2,392.
  • Under SB5, my Homestead Exemption increases to $35,000, reducing my taxable value to $965,000, and my rate stays at $1.30. This means my taxes would total $12,545, tax relief of $130 vs my current taxes. Over 5 years, with 10% valuation increases, my tax relief would total $650.
  • Under HB4352, my Homestead Exemption increases to $50,000, reducing my taxable value to $9500,000, and my rate stays at $1.30. This means my taxes would total $12,350, tax relief of $325 vs my current taxes. Over 5 years, with 10% valuation increases, my tax relief would total $1,625.

For a homeowner with a $1,000,000 home, the advantage, in years one through 5, goes to HB3. The same caveat from the $750,000 home applies, but even more so here. This assumes that the school district doesn’t raise their tax rate, beginning to take back some of the $0.04 of compression. For a homeowner with a $1,000,000 home, SB5 is far and away the worst of the proposals.

Final Thoughts

Three plans. Three very different outcomes, but certainly tax relief in all three. Which plan should we support? To me, it comes down to who are we trying to help the most?

  • If we want to provide a consistent level of tax relief to all Texans, that can be accomplished by adjusting the Homestead Exemption. As you can see in the examples above, it doesn’t matter how much your home is worth, every homeowner will see the same level of tax relief.
  • If the goal is to provide everyone some relief, but those who’s homes are worth the most get the most relief, HB3 is clearly the winner. As your home is worth more, you save A LOT more.
  • If the goal is to provide everyday Texans who’s homes are worth $500,000 or less the most tax relief we can, you should really focus on HB4352, doubling the Homestead Exemption.
  • In no instance does SB5 provide the most benefit. Only in the $250,000 valuation does it even come in second for a few years.

The remaining days of the 86th Session of the Legislature will be very interesting. There are many different ways to address priorities, whether it’s tax relief, school finance, or a plethora of other issues impacting Texas. Your voice matters. Make sure your legislator hears it.