The Texas Senate Finance Committee held an interim hearing Wednesday to “identify the best combination to further increase the amount of homestead exemption and compression to continue cutting Texans' property taxes.” The committee was also tasked with “reporting on the cost to eliminate public school maintenance and operation (M&O) property taxes, all school property taxes (M&O and I&S), and all property taxes and how much state revenue would need to be generated to replace foregone property tax revenue, and from what source.”   

Committee members questioned invited witnesses on the fiscal consequences of eliminating property taxes, including whether revenue reallocations would be required for public education funding and local government funding, and the potential impact on the state's ability to respond to disasters and other urgent priorities. Invited testifiers included Maggie Jebsen from the Legislative Budget Board (LBB), Korry Castillo from the Comptroller’s Office, and Texas Education Agency Commissioner Mike Morath. 

Although some think tanks and elected officials would like to eliminate property taxes altogether, the invited witnesses presented significant drawbacks of doing so to the committee. For example, the highest sales tax rate of any state in the U.S. currently is approximately 10%, but in order for Texas to make up lost revenue from property taxes, the Texas sales tax would need to be around 22%. A tax rate that high would create issues for businesses in the state because people would shop out of state to avoid the huge tax. The LBB slides show that the total annual property tax levy is $81.5 billion. This amount is 90% of all Article 2 (health & human services) and Article 3 (public and higher education) budgets combined. Finding a revenue source to make up that amount of money is unlikely. 

Committee members took several opportunities throughout the hearing to promote the passage of Senate Bill (SB) 2/House Joint Resolution (HJR) 2 during the 88th Legislature. These property tax bills, among other things, increased compression and homestead exemptions. For example, SB 2 was brought up during the extensive discussion on recapture, specifically how despite historic property value growth, public school districts are now taxing their homeowners less because of the increased homestead exemptions ($100,000) and tax compression. In addition to the topic of recapture, Sen. Lois Kolkhorst (R–Brenham) and Chairman Brandon Creighton (R–Conroe) brought up the synergy between school finance, especially regarding ADA funding versus enrollment funding as it relates to lower enrollment, and issues that need to be discussed by future Senate Education Committees, such as truancy, behavior, teacher retention, etc.  

At the conclusion of invited testimony, the committee members asked the invited witnesses to determine the effect on other state programs if general revenue were used to fully replace school property taxes, particularly during economic downturns, and to report on how much state revenue would be needed to replace foregone property tax revenue and from what source it could be generated. 

Following the invited testimony, the committee heard from members of the public. During the public testimony, mayors and others who work in city/county government explained how eliminating property taxes would result in less local control and an increase in requests from cities and counties for more state aid for police and fire departments and infrastructure such as roads. They also discussed the unintended consequences of tax relief and the burden it puts on local government. 

Although interim charges and hearings can show us what might show up in bills next session, it’s important to keep in mind they may merely be discussions of ideas from which no proposed legislation emerges.