New Texas law tightens leash on local property tax rates

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New legislation restricting Texas local governments' ability to raise property tax rates could stress municipalities' creditworthiness, ratings analysts warn.

The Texas Property Tax Reform and Transparency Act of 2019, also known as Senate Bill 2, requires some local governments to obtain voter approval to increase maintenance and operations property tax revenues more than 3.5% above the previous year.


The M&O tax cap does not apply to new construction or a separate rate for debt.

Gov. Greg Abbott, who signed SB 2 into law Wednesday, called the measure a major reform designed to curtail collections rising with property values in the growing state.

"We made it clear from the outset of this session that our goal was not to simply mask the problem of skyrocketing property taxes, but to make transformative changes that would provide meaningful and lasting reform," Abbott said. "By signing Senate Bill 2 into law, we are making tremendous strides to provide long-awaited relief to Texas homeowners and businesses."

The bill lowers the property tax rollback rate to 3.5% for cities and counties. Any increase to the new rollback rate in cities, counties, and some special districts will require voter approval and automatically trigger a tax ratification election. The rollback rate will be renamed the voter approval tax rate.

SB 2 also requires taxing units to post their budgets, tax rates, and tax rate calculation worksheets online. The bill alters the appraisal and protest process, such as prohibiting an Appraisal Review Board from increasing the value of a taxpayer property above its initial value, increasing training requirements for ARB members and arbitrators, and entitling taxpayers to the evidence the appraisal district plans to present at their ARB hearing at no charge.

But ratings analysts and local government officials noted the downside to the legislation that would limit local revenues.

"Revenue loss due to the new legislation has the potential to create structural gaps in future years, particularly in circumstances where economic growth is stagnant," said S&P Global Ratings credit analyst Andy Hobbs.

At Fitch Ratings, analyst Steve Murray said the new law will hinder some local governments' independent revenue raising ability, “and that ability is a component of one of Fitch's four key rating drivers in its U.S. public finance tax-supported rating criteria.”

“Although Fitch does not expect the law to trigger a significant number of rating actions immediately, given other core credit strengths, it fundamentally weakens one of the key powers that a government has to control its financial position and leaves it more vulnerable to weakening if other credit strengths deteriorate,” Murray said.

The Texas Municipal League, which lobbied against the bill, noted some concessions, such as allowing for three-year banking of any unused rollback increment and a guaranteed $500,000 levy increase threshold for most cities under 30,000 population.

“The tendency to ‘bracket’ legislation to a certain size city, which is typically opposed by the League, is a disturbing trend that warrants further study prior to next session,” the TML said.

“One way to put SB 2 into perspective is to consider that the state budget passed this session will grow state general revenues, supported by state taxes, by at least 9.5% more than the budget passed two years ago (and perhaps higher, depending on how the numbers are calculated),” the league said. “No vote of the people was held to sanction that growth, yet cities must take increases over 3.5% to their voters. The only possible explanation for that cognitive dissonance is that the state legislature thinks their decisions are superior to those of local officials.”

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