What Texas’ $18 Billion Property Tax Plan Means for Commercial Owners

Texas happens to be sitting on top of a record-breaking $27 billion budget surplus, prompting the largest tax relief proposal in Texas history. The tax relief package is set to hit Governor Greg Abbott’s desk in November, primarily under Senate Bill 2 and Senate Bill 3, initiating cuts to school property taxes and providing franchise tax relief for small business owners. However, there’s more to the cuts than this, with commercial owners also standing to benefit from additional tax relief provisions if the legislation passes in November. Here’s what Texas’ $18 billion property tax plan means for commercial owners.

Key takeaways:

• Texas’ proposed $18 billion property tax relief plan comprises two bills: Senate Bill 2 and Senate Bill 3. These bills would change the property tax laws for school and homestead taxes and outline provisions for franchise tax exemptions.
• This is the largest tax relief proposal in Texas history, marking an important step in alleviating many property owners in their obligations to pay high taxes, with some businesses having the potential to be exempt from paying the franchise tax.
• These new tax laws also introduce a temporary circuit breaker, capping taxation at 20% of a non-homestead property’s value if that value is $5 million or less, further providing relief to many residential and commercial property owners.

What Is Texas’ $18 Billion Property Tax Relief Plan?

The proposed tax relief package comprises three bills: Senate Bill 2 for property tax cuts, Senate Bill 3 to integrate a franchise tax relief program, and House Joint Resolution 2, which is a required constitutional amendment for authorizing the cuts. Here’s a breakdown of each bill and what it could mean for you:

Senate Bill 2

Senate Bill 2 is the primary bill in the proposed package and will reduce the school property tax rate for all Texas homeowners and commercial properties. This bill comprises several other provisions, including an increase from the $40,000 maximum homestead exemption to $100,000. Additionally, the state government will pay a larger part of the school budget, helping to cut school property tax rates for Texas citizens.

Property tax rates for Texas schools have undoubtedly increased faster than taxpayers can pay them, aggravating housing affordability. But if this monumental legislation passes, it could limit government and state spending and help reduce district property taxes. And this can contribute to maximizing your tax refund if you own residential or commercial property.

Senate Bill 3

Outlines under Senate Bill 3 increase franchise tax exemptions, which extend to small businesses. This will increase no-tax-due thresholds from around $1.2 million to over $2 million of a franchise’s total revenue. This means the potential for eliminating the obligation to pay franchise taxes completely for tens of thousands of Texas businesses. In addition, Senate Bill 3 comes with major advantages for small business owners operating out of their homes and commercial owners looking to relocate to Texas, as the provisions under the bill would mean fewer or no tax costs.

House Joint Resolution 2

House Joint Resolution 2 is the constitutional amendment that authorizes an election for Senate Bills 2 and 3 on the upcoming November ballot. The Texas Senate had to introduce this constitutional authorization because the amount the state is willing to fund is more than it’s allowed to spend. This amendment will allow for the provisions of both Senate bills and covers a cost-of-living-adjustment that would ultimately support retired educators and provide homestead tax exemptions.

Provisions

Several key provisions outline how the new tax relief plan will work:

Rate Reductions

If this new legislation passes, it would mean significant tax rate reductions under rate buy-downs. Most Texas school property taxes comprise maintenance and operation, with the largest portion accounting for 40% of all paid property taxes. Currently, this provides school districts with $32.5 billion every year.

Under the new tax relief plan, however, districts would reduce maintenance and operation taxes. The state would send money directly to the school districts to make up for lost revenue. Moreover, the state expects to reduce these maintenance and operation rates by $0.11 per every $100 of your property value. This means significant savings for commercial owners, landlords, real estate investors, and developers.

Franchise Tax Relief for Businesses

Many business owners are set to benefit from franchise tax relief that doubles the total exempted taxable revenue from $1.2 million to almost $2.5 million. The proposed franchise tax relief plan also amends current tax laws to exclude certain taxable businesses from filing for franchise tax. Furthermore, the franchise tax relief plan will mean businesses that don’t owe taxes aren’t required to file information reports with the Texas comptroller.

Appraisal Cap Pilot Program

A temporary circuit breaker is also in the works under the new tax laws. Should Senate Bill 2 pass in the upcoming election, it would provide a 20% appraisal cap rate, limiting the amount of money you would pay in taxes based on the appraised real estate value — commercial or residential. This means that if your property is valued at $5 million or less, the taxable rate gets capped at 20% of the total value. This temporary circuit breaker applies to properties that aren’t considered homesteads, as the latter are already covered under Senate Bill 2.

Who Benefits?

This tax relief bill aims to reduce property tax rates for Texas schools, increase homestead exemptions, establish an appraisal cap plan, and introduce more franchise exemptions for commercial and residential owners. Additional tax relief will come from the following:

• More than $12 million to reduce school property tax rates for Texas homeowners and business properties.
• A $100,000 homestead exemption, providing major tax cuts for about 5.7 million Texas homeowners and homestead property owners.
• An appraisal cap pilot program introducing a 20% circuit breaker for non-homestead properties — including commercial and residential properties — appraised at $5 million or less.

The proposed tax relief plan is also set to reduce franchise tax rates for small businesses. Unfortunately, this new bill doesn’t impact or provide relief for renters directly, even though legislators tried to include a separate provision for them before the final ruling. Even so, Texas Speaker Dan Phelan states, “Reducing property taxes, providing relief to small business owners, and reforming our appraisal system will ensure economic growth and prosperity, and this agreement is a significant victory for all Texans.”

What Does This Mean for You?

Ultimately, the combination of the proposed tax bills plus the provisions of the temporary circuit breaker under these new laws means added protection for residential and commercial property owners. Depending on your property’s value, you could end up not having to pay taxes at all under the school property tax reduction and franchise tax relief plans.

In addition, the new laws will bring much-needed relief to small and medium-sized businesses, as Texas historically has some of the highest property tax rates in the U.S. But all this changes with the introduction of Texas’ $18 billion tax relief plans, which can mean even more opportunities to invest in real estate.