As the debate about the superior property tax relief package continues, many would imagine the most common question that TFR gets is whether we support tax compression or increasing the homestead exemption. Although that is a safe assumption, that is not the case.
The most common question we get is: “What on earth is tax compression?” The goal of this article is to explain what tax compression is and why TFR—and basically all economic organizations—believe this is the best form of property tax relief.
What Is Tax Compression?
When we talk about compressing tax rates in Texas, we are almost always talking about the school M&O (Maintenance and Operation) portion of property tax bills. This makes up roughly half of the property tax bills for most Texans.
Compressing rates to lower property tax bills involves taking tax revenue from the state (usually from General Revenue in the budget, which is made up of roughly 85% of sales tax revenue) and using that to buy down rates in local ISDs.
In simplistic terms, compression is applied in cents per $100 value of a home. The current average home price in Texas is around $300,000. So, let’s show the math. Let’s just say that the current rate of taxation on a home in your area is $1.00 for every $100 of the valuation of your property.
($300k home / $100) x $1.00 = $3,000 in School M&O taxes
After a $0.20 compression
($300k home / $100) x $0.80 (.20 in compression) = $2,400 in School M&O taxes
This equals roughly a 20% reduction in the school M&O portion of your property tax bill.
Strengths of Compression Over Other Methods
1) Compression correlates with a percentage of your tax bill as opposed to the flat dollar amount that we see in homestead exemptions. One of the reasons we have seen the need to continue to raise homestead exemptions is that in a high inflationary environment with out-of-control appraisals, the dollar amount evaporates very quickly. This is not the case with compression. If your property receives a higher valuation, then the compression stays the same based on every $100 of valuation. So, if your home is $300k or $700k, you still get $0.80 of compression per $100.
2) Compression gives relief to the entire economy because it applies to all property taxes: homestead, rental property, and business property. Lowering overhead for all Texans makes Texas more competitive and ultimately lowers prices on all goods and services, and we all benefit.
3) Property tax compression assists in putting us on a path to school M&O elimination. TFR has been a champion of restoring property rights to Texans by advocating for the end to homeowners leasing their property from the state (in the form of perpetual property taxes). Every time we compress tax rates, that rate gets closer to $0.00, which essentially moves school funding to state General Revenue (or makes it funded by sales tax revenue).
Compression is an important step toward eliminating property taxes. Methods like the homestead exemption work against elimination as they simply shift the burden of taxes to rental properties and other business properties and raise rates more than otherwise. This hurts the economy, small businesses, and real estate investors.
Simply put, compression puts us on the path to eliminating school property taxes in a way that the homestead exemption cannot. Will Texans experience relief with something like a homestead exemption increase? Yes, homeowners will, but everyone else is left out in the cold. If you support the restoration of property rights, a path to elimination, and lasting permanent property tax relief, then property tax compression—along with freezing property tax increases and limiting state and local spending growth—is the clear method for accomplishing this.
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