After a monthslong standoff among Texas’ top Republicans, state GOP lawmakers finally struck a deal Monday on how to cut Texans’ property taxes.

The $18 billion compromise between the Texas House and Senate — which includes more than $5 billion approved for property tax relief in 2019 — would lower taxes for the state’s 5.7 million homeowners and add a temporary cap on appraisal increases for some non-homesteaded properties.

It would also cut franchise taxes for small businesses and send billions of dollars to school districts so they can cut their taxes across the board. However, none of that money will go toward additional public education funding, according to legislation filed by state budget leaders on Monday.

The proposal must clear both chambers before it heads to Gov. Greg Abbott’s desk. Abbott said he looks forward to approving it. Then voters must pass the plan in a constitutional election in November. If voters approve the deal, the cuts would start with the 2023 tax year.

“I promised during my campaign that the state would return to property taxpayers at least half of the largest budget surplus we have ever had,” Abbott said in a statement after Monday’s announcement. “Today’s agreement between the House and the Senate is a step toward delivering on that promise. I look forward to this legislation reaching my desk, so I can sign into law the largest property tax cut in Texas history.”

Lt. Gov. Dan Patrick said the last week of negotiations among himself, Texas House Speaker Dade Phelan and members of both chambers “made the difference.”

“It has been a long road, but this is a great day for all property owners,” Patrick said. “It may have taken overtime, but the process has produced a great bill for homeowners and businesses.”

The legislation, expected to be passed this week, allocates about $12.6 billion to reduce the school property tax rate by 10.7 cents per $100 valuation for homeowners and business properties. It also includes an increase to the state’s homestead exemption from $40,000 to $100,000 at an estimated cost of $5.3 billion, and some extra relief for seniors and property owners with disabilities, averaging an extra $170 per year.

The Senate bill’s author, state Sen. Paul Bettencourt, R-Houston, said the deal would save the average homeowner about 41.5% on property taxes each year, or an average of about $1,300 per year.

“Taxpayers WIN! All residential and commercial real property WIN! 5.72 million homesteaders WIN!” Bettencourt said in a written statement.

Another part of the plan, which in a way revives a contentious idea the House had previously proposed, would institute a three-year, 20% cap on appraisal increases for commercial and non-homesteaded properties valued at $5 million or below — a number that could be adjusted by the comptroller with inflation each year.

Leaders referred to that part of the bill on Monday as a “circuit breaker” program, but it’s somewhat of a misnomer. Unlike programs in other parts of the country with the same name, the Texas proposal does not calculate property taxes based on a person’s income or ability to pay, nor does it specifically seek to benefit lower-income taxpayers.

“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,” Phelan said in a statement.

The new property tax relief bill, a franchise tax relief bill and the constitutional amendment required to enact the cuts were filed Monday.

The deal marks the end of a stalemate among the state’s top Republicans that lasted nearly seven months as they butted heads over how to dole out $12.3 billion in new tax breaks budgeted by lawmakers earlier this year.

Republicans came to Austin this year with a nearly $33 billion surplus and big promises to use a big chunk of it to provide tax relief to Texas property owners, who pay some of the highest property taxes in the nation. But for most of the year, the heads of the House and Senate — Phelan and Patrick — couldn’t come to terms on how to do it.

The main dividing line came over whether homeowners or business owners would get a bigger tax break. Phelan and House lawmakers wanted to send the entire $12.3 billion in new money to school districts to lower their tax rates, a kind of tax cut referred to as “tax rate compression.” Doing that would result in across-the-board cuts for all property owners, but it would most benefit business owners.

Abbott and conservative tax-cut warriors saw the proposal as a way to put the state on a quicker path to eventually eliminating the school maintenance and operations tax, the bulk of the school property tax that pays for day-to-day school expenses like teacher salaries. But as the weeks dragged on, Abbott’s support for a compression-only tax-cut proposal seemed to wane as he encouraged House and Senate leaders to come to a deal and send him a bill.

Patrick and Senate tax-cut writers had agreed with the House on allocating $12.3 billion for property tax cuts but wanted to use only 70% of that amount for tax rate compression so they could use the rest to pay for a boost to the state’s school district homestead exemption, the amount of a home’s value that can’t be taxed to pay for public schools. Patrick and Bettencourt, Patrick’s lieutenant on the tax-cut issue, pushed for raising the exemption from $40,000 to $100,000.

Proposed temporary appraisal cap

An earlier proposal sought by the House to put a tighter cap on how much taxable property values can rise each year — also known as an appraisal cap — was left out of the final deal.

Currently in Texas, those appraisals can only increase by 10% each year. That benefit only applies to people who own the homes they live in. The House proposal would have narrowed that cap to 5% and extended it to include businesses and other non-homestead properties, an idea that drew harsh criticism from tax-policy advocates on both ends of the political spectrum.

Its proposed replacement in the deal announced Monday is a pilot program that caps appraisals for lower-valued non-homesteaded properties. The program would be a brand new addition to the tax code but does not — in spite of how leaders are describing it — amount to a traditional circuit-breaker program.

Circuit breaker programs are unofficially referred to as such because the goal is to — much like an electrical circuit breaker — cut off the cost of property taxes before they can do damage to a taxpayer’s financial situation. They provide targeted relief to certain residents, like seniors or renters, when their tax bills take up too much of their income. Some states administer them as part of the income tax or property tax systems, while others treat the cuts as rebates, according to an analysis by Every Texan, a progressive think tank in Austin.

A successful program in Texas that is income-based would likely need to be a rebate-style program because Texas has no statewide property tax and no income tax, which would help verify a person’s income and make such a program easier to administer, the Every Texan analysis says. An idea for a similar program in Texas died in the 1990s because it came with enormous administrative costs in the absence of an income tax, according to Every Texan.

Monday’s deal appears to sidestep those complications because the program isn’t based on taxpayer income but instead is targeted at lower-valued property — which advocates for lower-income residents worry will not necessarily benefit renters and lower-income property owners.

The Texas program would expire on Dec. 31, 2026, unless lawmakers decide to renew it or make it permanent later.

Absent from either chamber’s previous proposals was any targeted tax relief for the state’s 3.7 million renter households. House Democrats last week unveiled their own tax-cut package that would give tenants a cash refund equaling up to 10% of the rent they paid the previous year. But Republicans didn’t include anything like that in the package released on Monday.

Republicans and some tax policy experts argue that renters will benefit from the compression portion of the tax-cut package because landlords won’t pass as much in property taxes onto their tenants — thus resulting in smaller rent increases. But others say demand for the state’s red-hot rental market and a dearth of supply to meet that demand, not property taxes, have driven rent increases in recent years.

“Except for last year’s exceptional real estate market, most properties will probably be unaffected by this provision,” said Dick Lavine, tax policy expert at Every Texan. “And, even if the proposed cap keeps taxes on a rental property from going up faster than they would otherwise, there is no guarantee that a benevolent landlord will pass on the savings to their renters.”

Still, with previous House plans being criticized for being more beneficial to wealthy homeowners and businesses than for lower-income Texans, the temporary new cap appears to be the most novel addition to Monday’s deal.

And it’s the closest thing to a win that the House appears to have in the compromise, which includes the entire homestead exemption the Senate was asking for — but only 60% of the compression the House and Abbott were pushing for during the year’s first special legislative session.

Given the resistance to previous appraisal caps proposals, it’s a concession that seemed unlikely in the early days of the negotiations.

For much of this year, Phelan and state Rep. Morgan Meyer, a Dallas Republican and the House’s chief tax-cut writer, sought to tighten the state’s appraisal cap for homeowners and extend the benefit to business owners — a push that came in response to complaints from residential and commercial property owners whose property values dramatically increased in recent years amid the state’s red-hot housing market and booming economy.

Housing and tax policy experts warned that such a proposal would have all kinds of nasty side effects without ultimately cutting tax bills and was a non-starter for Patrick and Senate Republicans.

This article was written by  KAREN BROOKS HARPER AND JOSHUA FECHTER of The Texas Tribune. This article originally appeared at: https://www.texastribune.org/2023/07/10/texas-legislature-property-tax-cuts-deal/