The Great Property Tax Stand-off of 2023, Part 3: Which Way Forward?

by Ashley Bean Thornton

I am fascinated by the current stand-off between the Texas House of Representatives (and Governor Abbott) and the Texas Senate (and Lieutenant Governor Patrick) regarding property taxes.  In the first post of this series  I took a little time to educate myself about my own property tax bill.  In the second post, I took a look at the two competing proposals from the House and Senate. In today’s post I’m just noodling about what I wish they would do.   – ABT

Super quick summary of the last two posts…

The 88^th Legislature found themselves with a $37.2 billion budget surplus to spend.  Both the Governor and the Lieutenant Governor seemed determined to spend at least part of it ($12-15 billion) on providing property tax relief, specifically relief on the property taxes used to pay for public school.  The House and the Governor want to provide an across-the-board tax rate reduction of a little more than 0.16%.  The Senate and the Lieutenant Governor want to provide an across-the-board tax rate reduction of 0.10% and a homestead exemption of $100K.  The two legislative bodies could not agree on a bill during the regular session, so the Governor called a special session.  The House used the session to approve their bill, then they adjourned leaving the Senate to “take it or leave it.”  The Senate decided to “leave it,” so now the idea of property tax relief is stuck, waiting for the governor to get it rolling again with another special session.

What happens when the surplus is gone?

It looks like we will be cooling our jets for a while regarding property taxes while this unusual Republican vs. Republican squabble gets sorted out.

That gives us all a little time to noodle about which proposal seems best.

One thing I have been noodling about is what happens when all this surplus money is gone?

The Governor has been pitching the House plan as the first step towards eliminating property taxes completely.   (I am assuming when he says that he is talking about the part of property taxes we use to pay for schools.) “Texans want to OWN their property, NOT rent it from the government,” he tweeted on June 2.

Hmmm…the comment about “renting” doesn’t make that much sense to me, but I guess he is trying to say that people would rather not pay taxes on their property.  To which I feel like saying – Well, no kidding! People would rather not pay taxes on anything.

We would all love to keep that money, but on the other hand we also like having public schools.  So…how do we get the thing we want (schools) without paying for it (with property taxes)?

The Governor says we don’t have to worry about that because Texas is growing like gangbusters and bringing in more revenue every year – The future is sunshine and rainbows!  According to this theory, as Texas grows, the state will be making more and more money.  The State can use all that new money to pay the cost of providing public school education without the help of local property taxes.

Taxes are Taxes

I have a few problems with this argument…

If the state is growing, doesn’t that mean more kids and more schools?  Won’t the cost for education grow at about the same pace as the new, growing population?

Also, I am old enough to be skeptical about a future of eternal sunshine.  In my experience the economy goes through pretty regular ups and downs.  If I were betting, I would bet we use up this surplus before we replenish it, and then what will we do? If we have drastically reduced or eliminated property taxes, where will the money come from to pay for schools once the surplus is gone?

Which brings me to my third problem with the “no property taxes” idea…as I briefly explained in my last blog, currently, Local Property Taxes + State Funding = School District Funding. But, “Local Property Taxes” and “State Funding” are really just two different ways of saying “taxes.”

Complicated as taxes may seem, in my mind, there are two basic questions:

• What do we want to pay for?
• Who is going to pay for how much of it?

In this case, we want to pay for our public schools.  So, who is going to pay for how much?  With property taxes, the local property owners bear more of the burden for the local schools.  When we say “State Funding” in the formula above, we might as well really be saying “state sales taxes,” right? We are all still paying those taxes, they are just spread out across everyone all throughout the state.

It’s worth noting that sales taxes are the most regressive tax.  Everybody buys stuff, so everybody pays sales taxes regardless of income or wealth, so the less money you have, the bigger percentage of it tends to be paid in sales taxes.  Property taxes are a little less regressive, because you have to at least be wealthy enough to have some property to be paying property taxes – but they are still a heavier burden, percentage-wise, on the folks with the least property.  Income tax tends to be the least regressive/most progressive tax because the percentage paid usually increases as income increases.

We famously don’t have income taxes in Texas.  There are pros and cons to that, but not having income tax doesn’t necessarily mean we pay less in taxes – it just means we answer the “who is going to pay how much?” question differently.  We have chosen to spread more of the tax burden to everyone (more regressive) than to ask people with more money to pay more (more progressive.)

To tie this back to the question at hand, if we eliminate property taxes, and if (as I expect) the current surplus is eventually depleted, we will have to do something to collect the money we need to pay for our public schools.  That means we will have to raise taxes somewhere – either reinstate the property tax, or raise sales taxes, or …heaven forbid…institute an income tax.

Unless, of course, we just decide to cut funding for public schools when the surplus is depleted.  That’s not what we are thinking about doing, is it?

The Lt. Governor seems to share my skepticism about getting rid of property taxes.  He has said several times that he thinks the dream of getting rid of property taxes all together is just that…a dream.  He too seems to think that the economy is a bit of a roller coaster, and we won’t always have big wads of extra money to toss around.

The Lt. Governor says all that, but I don’t see how the Senate plan is really that different from the House plan in terms of what happens when the surplus runs out.  The Senate is proposing reducing the property tax rate by 0.10% and increasing the homestead exemption to $100K.  If/when the surplus runs out, we will still need the same amount of money to run our schools, if not more.  Won’t we have to raise the tax rate and/or decrease the homestead exemption?

Is tax reduction the best idea?

With all this noodling I think I may be convincing myself that reducing property taxes is not the best use of this surplus money.  I think it might be better to spend the money on projects – improving infrastructure, funding research, something like that.  That way once the money is spent, we would hopefully have acquired some assets that would help us make some more money in the future.  Or maybe we could use it to endow a fund for rewarding effective teaching, or for providing mini-grants to small businesses?  My point is, maybe it is smarter to use one-time money for one-time expenditures rather than futzing around with (most likely) temporary tax relief.

It’s popular to cut taxes, and painful to raise taxes.  Usually there is a considerable lag between the moment we figure out we are going to need more money and the moment we finally gin up the political will to raise taxes to get the money we need.  That lag can be especially terrible for schools that are already operating on a shoestring.  It doesn’t seem wise to me to set ourselves up for that lag by cutting taxes now, when there is a good chance we will just have to raise them again later.

Still, it’s reasonable to argue that the surplus money came from the people, and we should return it to the people somehow.  Maybe we could include in the legislation some kind of automatic provision to turn property taxes back “on” and re-set the homestead exemption to its original amount if the funds available drop below a certain amount.  That would provide relief when the money is available – but also provide the revenue we need once the surplus is depleted without having too much of a lag.

But what’s really going to happen?

Unfortunately, I think the time has already passed for considering other ways to spend the surplus, or even playing around too much with the proposed plans.  The idea of reducing property taxes has taken root, and the opposing groups seem pretty set on what they want to see in a property tax relief bill.  So… back to the choices before us:

• The House Plan – Reduce the school property tax rate by 0.162% for everyone.
• The Senate Plan – Reduce the school property tax rate by 0.10% for everyone and increase the homestead exemption to $100K.

If I have to pick one of these, I pick the Senate plan.  Everyone gets a little something – so that will hopefully help keep the businesspeople happy. The $100K homestead exemption might help some folks of lesser means stay in their homes for a while longer.  That seems like a good way to balance the benefits of the surplus.

The main thing to me, at this point, is to go on and get something done. I don’t really understand the reasoning behind the House taking their gavel and going home before the work was finished.

Since the party with the majority of the votes seems to agree that property tax relief is the thing to do, surely it would be pretty easy to fiddle with the amount of the rate reduction a bit, and fiddle with the amount of the homestead exemption a bit and come up with a compromise both sides could accept.  Isn’t that why we have conference committees?

I don’t know what other factors are at play here that are making it hard for Republicans to compromise with their fellow Republicans to accomplish something they all want to do.  I guess we will have to wait till the next special session to find out.