A state property tax will cost taxpayers in about a quarter of the state's school districts their local homestead exemption, cutting into their property tax savings. In 180 districts -- including Houston, the state's largest -- current proposals for a state property tax could mean higher residential property tax bills.If lawmakers choose a state property tax to solve school finance, property tax rates will have to drop 20 percent from current levels before homeowners in many school districts see any property tax relief. The state's top rate for maintenance and operations taxes would have to drop from $1.50 to $1.20 before they'd see savings.
The first-year cut proposed by the Senate is lower than that -- dropping 13.3 percent to $1.30 -- but homeowners would keep their local property tax exemption that year. In the second year of the cuts, a state property tax would replace the local tax -- and the local exemption. That year, voters in districts with high local exemptions would see a higher tax bill.
With local add-ons, the overall property tax rate would eventually top out at $1.25, resulting in higher tax bills in some districts than homeowners pay today. Houston homeowners could actually do better if the legislative plans are a half-success, cutting local school property taxes but failing to replace them with a state property tax that kills local homestead exemptions.
Under current law, school districts are allowed to exempt up to 20 percent of a homestead's value from their tax rolls, in addition to the exemptions allowed under state law ($15,000 for homesteads, and another $10,000 for taxpayers over age 65).
The Senate's version of a state property tax leaves the state exemptions in place, but does away with the local options. It's not a local tax anymore, and that kind of local variation would make the tax higher or lower depending solely on the location of the taxpayer. Houston might cut homeowners a break while McAllen might not, and that would be unequal taxation at the state level.
The 20 percent tax break is, for the moment, a boon to homeowners in Houston and 179 other districts -- including most of the others in Harris County, the Highland Park ISD in Dallas County, Galveston ISD, West Orange-Cove (the lead district in the lawsuit against the state's current school finance system), Mineral Wells, Lago Vista and Lake Travis in the Austin area, Ysleta, and a mess of others. Other districts around the state give smaller but still significant local exemptions. Dallas ISD, the state's second biggest, knocks 10 percent off the value of homes for tax purposes. So do Richardson ISD, Midland ISD, Jefferson ISD and several others. The local breaks are in addition to the exemptions in state law for homeowners and, separately, for the elderly.
And the rest of the state's districts -- the 700-plus that don't give local exemptions to homeowners -- base their taxes on appraised values less the state's exemptions. Homeowners in those districts would get the full benefit of property tax cuts under a state property tax.
Homeowners elsewhere would offset their property tax rate cuts against the loss of their exemptions. The more generous the current exemptions, the less they'd benefit from the switch to a state school property tax, even with its lower rate.
The Senate wants to lower the cap on local school property taxes to $1.30 from the current $1.50. Senators would give voters a chance to replace those local taxes with a $1.10 state property tax. Local schools could add back up to 15 cents in local money onto that over time, bringing the ultimate rate to $1.25. If voters rejected the constitutional amendment, the state cap on local school property tax rates would stay at $1.30. As long as that's a local tax, the school districts have the option of continuing their 20 percent homestead exemptions. Even with a state property tax, they'd be able to grant the local exemption from taxable values for the locally added 15 cents for local enrichment. If they find themselves needing more money, they could also kill the local exemption altogether, bringing themselves in line with most of the school districts in Texas.
Some examples:
The owner of a $100,000 home in a district that gets only the state exemption takes $15,000 off the appraised value and thus pays taxes only on $85,000. At a $1.50 tax rate per $100 in value, that's $1,275. Under the Senate plan, the base value would remain at $85,000. In the first year, with a $1.30 local tax rate, the bill would come to $1,105, for a savings of $170. In year two, assuming voters went along, the state rate would drop to $1.10; the total bill would drop to $935, or $340 less than the current tax.
In a district with the 20 percent exemption, the numbers would be much different. Take off $15,000 for the state exemption, and $20,000 for the local exemption. The taxable value of that $100,000 house drops to $65,000. At a $1.50 tax rate, they're getting a deal right now, paying $975. The Senate plan would lower the rate the first year and leave the exemption in place, resulting in a tax bill of $845, a savings of $130. But with the constitutional amendment and the state property tax, the exemption would disappear as the rate fell to $1.10, bringing the tax bill to $935. That's a net annual savings of $40. Rising property values and local enrichment taxes would eat at that amount.
The folks with 10 percent local exemptions get a mixed result. Their $100,000 homes are on the tax roll at $75,000 now, meaning the tax at the $1.50 rate is $1,125. Their first year deal would net out at $975, a savings of $150. Their third-year number would be $935, a drop of $190 from current law.
Assuming voters approved the constitutional amendment, third-year savings for the owner of a $250,000 home would be $940 in the district with no local exemption, $565 in the district that currently has a 10 percent local exemption, and $190 in the district with the 20 percent local exemption.
That's how the state property tax is set up in the tax bill. There's an alternative version in the school finance bill that would replace the $1.50 cap with a $1.30 cap the first year, and then replace that with an 85-cent state tax combined with a 25-cent local tax. That still brings the second-year total to $1.10, but the local homestead exemption would apply to the local part of the tax, lowering the size of the bill.
For the owner of a $250,000 home in a district with the 20 percent exemption, the current tax at $1.50 is $2,775. It would drop to $2,405 at $1.30, and then would rise to $2,460 when the state/local property tax kicked in. That third-year would only set up that way with a constitutional amendment. As with the other state property tax, most voters in Harris County, under that plan, would be asked to vote to raise their school property taxes. In places with lower local exemptions, the tax bill would drop in both the first and second years of the shift.
Think about voting patterns when that constitutional amendment goes on the ballot: The first break would go to homeowners in places like San Antonio and Austin, the second in Dallas, the third in Houston. And remember that Houston homeowners (and others with 20 percent breaks now) would actually get a better deal if the Senate plan passes and the constitutional amendment fails. For them, that's the best mix of tax cuts and continued homestead exemptions. Remember, too, that Harris County accounts for more than 25 percent of the entire state vote in most constitutional amendment elections.
In all cases, local districts would be able to add on relatively small amounts for "local enrichment." School districts would be allowed to phase in those local add-ons, up to a maximum of 15 cents under the Senate scheme. That'd put the top tax rate at $1.25, or a nickel more than the break-even tax cut in Houston and other districts with 20 percent tax exemptions.