Texas goes big with dueling property tax cut legislation

The Texas Senate last week passed what one lawmaker called "off-the-charts, historical, record, unprecedented property tax relief." 

At $16.5 billion over the upcoming biennium, State Sen. Paul Bettencourt's string of superlatives for the tax cut package appears to be justified. 

Cheered on by Republican Lt. Gov. Dan Patrick, who heads the Senate, the measures sailed through the chamber in 31-0 votes, sending them to the House, which has its own plan to tap the state's overflowing coffers to ease the pain of constituents' rising property tax bills.

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"Since the comptroller stated in 2022 that Texas would have a budget surplus for the 2022-2023 biennium, I have been very clear that a significant chunk of that surplus must be returned to the taxpayers before committing to any new spending," Patrick said in a statement following the vote.

The projected size of that surplus, a record $32.7 billion, was announced in January by Texas Comptroller Glenn Hegar. 

The National Association of State Budget Officers reported in December that states in fiscal 2023 enacted the largest tax cuts as a share of general fund revenue in more than 20 years, while fiscal 2022 saw record state spending.

Now signs around the country point to declining revenue.

Inflation-adjusted state tax collections declined for a sixth consecutive month in January, when it was down 17.4% compared to January 2022, the Urban Institute reported this month. Texas was one of eight states reporting January tax revenue that showed a gain of more than 4%.

Lucy Dadayan, the institute's principal research associate, said the weakening was due in part to policy decisions, including tax rate cuts and expanded targeted income tax breaks. 

"Persistently high inflation, volatility in financial markets, higher interest rates, and weakening home prices are all likely to lead to a continuing slowdown in economic activity, which in turn will lead to further weakening in state tax revenue collections," she said in the report.

With more tax cutting on the horizon, states need to determine what they can afford over the long term, according to Josh Goodman, a fiscal policy researcher at The Pew Charitable Trusts.

"It isn't the case that states can't invest in any of their priorities, it's more a matter of considering the long-term picture, realizing how much risk you might be taking on, and then making an informed decision based on that assessment," he said.

Back in Texas, Gov. Greg Abbott, Patrick, and House Speaker Dade Phelan made a substantial reduction in property taxes a top priority for the legislative session.

Texas, which does not levy an income tax, ranked sixth among states for the highest property taxes paid as a percentage of owner-occupied housing value in 2020 at 1.66%, according to a September report from the Tax Foundation.

With the Lone Star State experiencing a population boom, the demand for housing has dramatically raised residential property values.

Approaches to help achieve historic property tax relief differ.

The Senate favors raising the homestead exemption for school district taxation to $70,000 from $40,000 and the House wants to lower the cap on appraisal increases for all property to 5% from 10%. The enactment of either method would depend on voter approval of a respective constitutional amendment.

The chambers' overall property tax cut proposals would put a huge hole in public school district funding that the state would fill, raising concerns about Texas' ability to meet a commitment to do both beyond the current projected surplus.

"Basically you're baking in what you're going to give to the local districts in order to make them have reduced levies," said Randall Erben, adjunct professor at the University of Texas at Austin's School of Law. "You have to keep that up."

House Ways and Means Committee Chair State Rep. Morgan Meyer said earlier this month his chamber's $17 billion plan would inject an additional $11.2 billion of state money into public education, pushing the state's funding share over 50% for the first time in more than two decades. 

Democratic State Sen. Nathan Johnson warned Senate colleagues last week to keep their "eyes wide open."

"We want to make sure we're responsible with the money and responsible to our public education system and don't make commitments that we can't keep or cause other damage in the future," he said.

Bettencourt countered that Texas is a "job creation engine" that has had "very rapid sales tax increases." While the state could face a crisis "someday," it won't go back on its commitment to taxpayers, he added.

Abbott announced Friday Texas led the nation for job growth over the last 12 months. Sales tax collections, which are the biggest revenue source for the Texas budget, were up 14.2% year-over-year in February, significantly outpacing inflation. However, fossil fuel-related production taxes continued to slump after reaching record levels in fiscal 2022. 

School funding in Texas could also be pressured if a push by Abbott and Patrick for school vouchers succeeds.

Other Southwest states are also moving on big tax cuts. 

Last week, Utah Republican Gov. Spencer Cox signed into law legislation he said will result in the largest tax cut in the state's history. 

The measures include HB 54, which reduces income tax rates for individuals and businesses to 4.65% from 4.85% at a cost of $475.4 million in fiscal 2024 and eliminates the state sales tax on food beginning in 2025 at an estimated cost of nearly $84 million in fiscal 2025 and $211.1 million in fiscal 2026, according to a fiscal note.

The latter cut is contingent on voter approval in November of a proposed constitutional amendment to expand the use of income tax revenue in the state budget beyond education and certain social services funding in order to accommodate lower sales tax revenue.

New Mexico's Democratic Gov. Michelle Lujan Grisham has expressed concern over the legislature's passage of HB 547, which she said would reduce recurring general fund revenue by about $1 billion or more than one-tenth of the state budget.

"Most New Mexicans have stinging memories of past years of painful funding cuts spurred by an imbalanced recurring budget," the governor said in a March 16 statement ahead of the bill's passage. "While this administration has done incredible work to diversify our economy and our revenue streams to protect ourselves from the busts of the oil industry, make no mistake that our state budget remains subject to unprecedented volatility with a high reliance on energy revenues."

In Oklahoma, the Republican-controlled House last week sent the Senate HB 2285, which would replace the state's graduated income tax structure with a flat 4.5% rate in 2024 and increase the standard deduction. The measure would reduce income tax revenue by $145 million in fiscal 2025, according to a fiscal analysis. The bill also establishes revenue triggers allowing annual 0.25% reductions in the flat rate.

"By eliminating our graduated income tax structure, the legislature would be conferring a tax advantage to the wealthy and setting the state up for another revenue failure," Democrat Whip State Rep. Mickey Dollens said in a statement.