A version of this piece can be read on Law360, here.
The Long Road to a Tax Deal
For nearly a year, Texas politicians have promised historic tax relief in 2023, made possible by a record budget surplus from sales and severance (oil and gas) taxes. Last September, referring to the then anticipated $27 billion surplus, Governor Greg Abbott promised taxpayers: “Because this is your money, I want to return at least half of that money to you with the largest property tax cut ever in the history of Texas.” And in early January, just prior to the 88th Legislature, Texas Comptroller Glenn Hegar announced that the surplus had risen another $5 billion to $32.7 billion. In the face of another year of rapidly increasing property tax appraisals, and the expiration of a widely used property tax incentive program, the stage was set for the Texas legislature to deliver a major and much-needed win for taxpayers.
But the regular legislative session ended with no tax-reduction package and with infighting between Governor Abbott, Lieutenant Governor Dan Patrick, and House Speaker Dade Phelan that made national news. The Texas House (led by Phelan and backed by Abbott) wanted to devote all relief to cutting tax rates, proposing a school district property tax rate cut of 16.2 cents per dollar of tax. The Senate (led by Patrick) pushed raising the homestead exemption from $40,000 to $100,000, with a rate cut of only 10 cents. The competing plans pitted businesses and renters (groups which get nothing from homestead exemptions) against homeowners.
Governor Abbott called a 30-day special session immediately after the regular session ended and signaled his support for the House plan. When it became clear that no immediate resolution would be reached during the first part of the special session, Abbott began a veto campaign as leverage to force cooperation between the House and Senate. Abbott vetoed 76 bills from the regular legislative session, many of which Abbott suggested he may be willing to reconsider after a property tax relief bill makes it to his desk. But despite these efforts, the first special session ended without a deal on tax relief. A second special session was called.
The Tax Relief Deal
On July 10, the two sides announced an agreement. The House and Senate quickly moved forward with legislation to implement the agreement. Senate Bill 2 addresses property tax relief. Senate Bill 3 provides franchise tax benefits, and House Joint Resolution 2 proposes a constitutional amendment required to enact the tax cuts. Voters must pass the plan in a constitutional election November 7, 2023, for it to take effect.
SB 2, SB 3, and HJR 2 collectively do the following:
- Increase the mandatory school district homestead exemption from $40,000 to $100,000. Adjust the amount of taxes due to a school district for a homeowner who is 65 years or older, or disabled, to reflect both the new $100,000 general exemption and the 87th Legislature’s increase to $40,000 from $15,000 for a homeowner who is 65 years or older, or disabled.
- Exempt the appropriation to pay for the increase in the homestead exemption, adjustment of taxes paid by the elderly and disabled, and certain appropriations to pay for school district ad valorem tax relief from the constitutional limitation on the rate of growth of appropriations.
- Reduce school district property tax rates by 10.7 cents per dollar of tax. Combined with a rate reduction scheduled to take place under current law, this will result in a total rate reduction of approximately 20 cents per dollar in tax year 2023.
- Benefit small businesses by increasing the no-tax-due threshold for franchise tax from $1 million to $2.47 million in total revenue and eliminating the annual filing requirement for taxable entities that owe no franchise tax.
- Institute a three-year, 20% cap on appraisal increases for commercial and non-homesteaded properties valued at $5 million or below (adjustable by the comptroller to reflect inflation).
The legislation will use approximately $18 billion of the $32.7 billion surplus, which fulfills Abbott’s campaign promise. All taxpayers will benefit significantly, but there is some skewing of the impact across taxpayer segments. Texas homeowners (especially smaller homeowners) will see the greatest proportional benefit due to the homestead exemption. The franchise tax and appraisal cap provisions also shift some proportional benefit to small Texas businesses. Large businesses will clearly benefit as well, but comparatively will bear the brunt of the partial shift from rate reduction to these other benefits that large businesses cannot use.
Keeping an eye on the business tax burden is important if Texas wants to preserve its business-friendly reputation. Texas is already a state with unquestionably low taxes for individuals; but for businesses, Texas is a relatively high tax state. According to one study, thirty-six states have a lower overall business tax burden, leading to the study labelling Texas’s characterization as a low-tax state as a “partial myth.”1 And in their annual survey of state and local taxes on business, EY estimates that businesses pay about 3/5 of all Texas property taxes.2 The new legislation is likely to increase business’ share. With this context, the legislation might be viewed as something less than a home run for business, although clearly still a positive.
Other Tax Legislation
While the 2023 legislative sessions were relatively quiet on the tax front apart from the tax relief drama, there were a few additional tax bills of interest to both individuals and businesses:
HB 5 enacts a property tax incentive program for school districts (which collect roughly half of Texas property taxes) to replace the expired school district incentive program commonly known as Chapter 313. Like former Chapter 313, HB 5 provides a 10-year tax incentive for a qualifying project. However, while Chapter 313 capped the appraised value of a project at less than $100 million (regardless of the project’s market value), HB 5 will in most cases limit the incentive to 50% of market value. HB 5 does, though, have a new exemption for construction work in progress. But it remains to be seen whether HB 5 will be utilized as much as Chapter 313 was, because unlike Chapter 313, there is no mechanism under HB 5 for school districts to share in the tax savings from the program. The applicable school district must approve any agreement under HB 5, and without a school district benefit, it may be more challenging to obtain this approval. HB 5 takes effect January 1, 2024.
Effective January 1, 2024, HB 796 will require each appraisal district to maintain a searchable database with information about appraisal review board (“ARB”) protest determinations in that county. The database will include information about the property being protested, the outcome of the protest, and the ARB members who decided the protest. This will provide much needed transparency to the administrative review process. Currently, ARB hearings are public, but there is no way for anyone other than the property owner to determine when a protest will be heard, and there is no way to determine the outcome of a protest without attending the hearing.
Effective January 1, 2024, HB1058 authorizes a credit against franchise tax or insurance premium tax for entities with qualified low-income housing developments. Texas Department of Housing and Community Affairs (TDHCA) determines eligibility for qualified development status, consistent with its determination of eligibility for federal low-income housing tax credits. The bill gives Texas another helpful economic development tool, given that the state must compete for low-income housing development with many other states that have adopted state low-income housing tax credits to augment the federal credit.
Effective September 1, 2023, HB 591 exempts from the severance tax gas produced from certain wells that is consumed near the well and would otherwise have been lawfully vented or flared. This exemption creates a more equal severance tax playing field for producers that are able to make alternative uses of stranded gas that would otherwise be disposed of through venting or flaring. For example, mobile bitcoin mines are able to use stranded gas to generate electricity for bitcoin mining. Lawfully flared or vented gas is not subject to severance tax, but prior to HB 591, it was not clear whether stranded gas sold to mobile bitcoin miners was subject to severance tax. HB 591 provides a clear exemption for alternative uses such as this.
Effective September 1, 2023, SB 379 exempts certain family care, wound care, and feminine hygiene products from sales and use taxes. This bill received significant media attention and responds to lobbying efforts from a number of different groups, so its passage was important for public relations and equity purposes.
Effective September 1, 2023, HB 2691 removes certain procedural requirements that have historically prevented the Texas Comptroller from promptly applying tax payments to satisfy tax or other agency debts and returning any excess payments to the taxpayer. The bill makes practical sense for both taxpayers and the Comptroller – prior to its passage, the Comptroller could be stuck holding payments in excess of the debt owed but be unable to release any funds to the debtor until obtaining agency releases or waiting at least 30 days.
Evaluating the session as a whole, taxpayers that are large businesses could have done somewhat better – more school district tax rate reduction, a larger percentage of school district tax reduction under HB 5, and/or school district tax benefit sharing under HB 5 could have further helped the outlook for existing large business and the effort to attract new large projects. However, overall, the 2023 legislature ultimately delivered a critical assist to Texas’s ongoing push to brand itself as tax and business friendly and bolstered the position that Texas’s low tax perception is more reality than myth.
1Texas Taxpayers and Research Association (TTARA), The Partial Myth of Texas as a Low Tax State, Austin, TX, January 2023.
2 EY (Ernst & Young), STRI (State Tax Research Institute), and COST (Council on State Taxation), Total State and Local Business Taxes, State-by-State Estimates for FY21, Washington, D.C., December 2022.
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