Texas Gov. Greg Abbott recently signed Senate Bill 2 (SB2), which would provide a $12.7 billion package of property tax cuts funded from a state budget surplus, and Senate Bill 3 (SB3), which would provide increased franchise tax relief for small businesses.

Both bills (collectively referred to here as “the legislation”) are subject to voter approval on Nov. 7, 2023, as each bill upon ratification would result in separate amendments to the state constitution upon enactment.

Property tax relief

Pending voter approval of SB2, the property tax relief would be applied under the following three provisions:

1. Compressed school tax rate
2. Homestead exemption expansion
3. PILOT (Payment in-lieu of tax) program

Compressed school tax rate

The property tax rate in Texas is made up of several components, with the school tax rate making up the largest component (approximately 60% to 70%) of the overall tax rate. SB2 would reduce the maximum compressed tax rate for the 2023-2024 school year; the state would send approximately $7.1 billion to local school districts to be used to buy down the school district maintenance and operations (M&O) tax rate by 10.7 cents per $100 of a property’s assessment, per a Texas Tribune analysis. The school tax rate compression would apply to all Texas residential and commercial real property owners.

Expanding homestead exemption

The legislation also calls for an estimated $5.3 billion to be used to increase the homestead exemption from $40,000 to $100,000 for school tax levies. For example, a home appraised at $350,000 is being taxed at $310,000 under the current $40,000 exemption. This legislation would increase the exemption to $100,000, thus lowering the taxable value to $250,000. 

Both the compressed school tax rate and expanded homestead exemption would first impact tax bills issued in October 2023. They are intended to be permanent, although future legislation could result in further changes. The actual property tax benefit for each homeowner from this expanded exemption will depend on the combined tax rate of the locality where the homestead is located.

PILOT program

SB2 includes a proposed three-year PILOT program intended to provide relief for small businesses by limiting the increase in assessed values to 20% per year for non-homestead properties with a taxable value assessed under $5 million. This program would likely provide limited benefit, as instances of assessment values increasing annually by 20% or more are generally infrequent. If SB2 is approved, the PILOT program would begin in 2024 and end on Jan. 1, 2027, unless lawmakers and voters decide to extend it.

Franchise tax relief

Currently, limited liability business entities or a controlled group of entities constituting a single unitary business enterprise (collectively referred to as “taxpayer”) are required to file a franchise tax report and pay the tax unless: 

1. the calculated tax liability is less than $1,000 or
2. the taxpayer has total gross revenue of less than $1 million ($1.23 million inflation indexed for the 2022 tax (2023 report) year)

In the event a taxpayer falls below either of these thresholds, they are still required to file a No Tax Due franchise tax report.

If ratified by voters, SB3 would provide for expanded franchise tax relief for small business taxpayers with overall gross revenue of $2.47 million or less. Taxpayers that fall under this higher minimum gross revenue threshold would be exempt from tax and not required to file a franchise tax report – not even a Not Tax Due report – for that tax year. SB3 would become effective on Jan. 1, 2024, for the 2023 tax year.

What does CohnReznick think?

This new legislation would provide significant changes to corporate and partnership taxpayers doing business in Texas. As such, it is important for such businesses to review these changes and consider their implications pending the likelihood that such Legislation is ratified by voters. We recommend you consult with your tax advisor to confirm how these potential changes might impact your business.

Contact

Tony Franco, Director, State and Local Tax Services

959.200.7137

John Iannotti, CPA, Partner, State and Local Tax Services

469.669.7506

^{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}