As Texans continue to get crushed under the ever-increasing burden of property taxes, Governor Abbott has promised them the “biggest tax cut in Texas history” and the Legislature appears poised to deliver—eventually.
During the closing days of the Regular session, legislators appropriated a massive $17.6 billion in tax relief for homeowners, renters, and businesses. But they hit a snag: how best to deliver that relief to taxpayers?
One of the more popular methods is called tax compression. The concept is relatively straightforward.
Every local school district adopts a maintenance and operations (M&O) tax rate to pay for its day-to-day expenses. The rate is then multiplied against a property’s value (less exemptions) to produce a tax bill. Tax rate compression simply refers to an intentional act to lower the tax rate, which reduces what taxpayers owe.
In recent years, tax rate compression efforts have centered on using state funds to buy down school district M&O tax rates to reduce property tax bills. An example of this policy in action is 2019’s House Bill 3. Part of the reason for the focus on M&O taxes is that they represent roughly half of the overall bill. The main benefit of targeting the M&O tax is that it keeps Texas on the pathway to elimination, with the tax rate making incremental progress to the $0.00 mark—permanently.
So what might this look like in the real world?
Imagine a home with a taxable value of $300,000 and an M&O tax rate of $0.90 per $100 of value. Without reform, this property’s tax bill (school M&O tax only) would be $2,700 annually. If the Legislature finally comes to an agreement on compression—and I believe they will—then the M&O tax rate will be reduced by $0.26 per $100 of value by the end of fiscal year 2025 (due to a 10-cent reduction under House Bill 3 and another 16 cents reduced under legislation likely in the future). That means that the tax rate applied to the $300,000 house would be $0.65 per $100 of value, yielding a tax bill of $1,950 – a savings of $750.
And that would be on an ongoing basis.
Of course, with tax rate compression it’s not just homeowners that would see this kind of relief. Businesses would also see their tax bills shrink because of the state-mandated tax rate cuts. Too, renters stand to gain as landlords could pass along tax savings in the form of lower rents.
That’s not to say that other tax relief methods don’t have their advantages. They do. But tax rate compression is the only approach that provides broad-based relief for all and propels Texas down the pathway toward a complete elimination of the property tax.
That’s something to get excited about.