Texas attorney general probes 'potentially illegal' property tax increases

Bloomberg News

Recently adopted property tax rate increases by four Texas cities may be in violation of a new state law that enforces a deadline for annual financial audits, state Attorney General Ken Paxton said on Thursday. 

Paxton sent letters to La Marque, Odessa, Tom Bean, and Whitesboro ordering them to halt "potentially illegal" tax hikes tied to their fiscal 2026 budgets until his office completes investigations. He also requested documents related to their tax rate actions and audits.

The letters said complaints had been filed with the attorney general's office alleging the cities violated a Texas law that took effect Sept. 1 by failing to comply with a state Local Government Code requirement to file their annual audits within 180 days of the end of the fiscal year.

If verified by the attorney general, the law prohibits cities from adopting a property tax rate for a tax year that begins on or after Sept. 1, 2025, that exceeds their no-new-revenue tax rate, which would essentially produce the same amount of revenue as the previous fiscal year. In the case of higher assessed property values, the actual tax rate could be lower to offset that growth. 

"I have grave concerns that municipalities across Texas have blatantly violated the law in an attempt to crank up people's property taxes," Paxton said in a statement. "My message to these cities is this: don't mess with Texas taxpayers. Local governments must abide by the law, and I will take every step to defend the people of Texas and their hard-earned dollars."

Texas Gov. Greg Abbott and other state officials have been seeking ways to stop local governments from eroding $51 billion in state-funded tax relief approved for the current fiscal 2026-27 biennium.

La Marque and Tom Bean officials did not immediately provide a comment about the attorney general's action.

La Marque, a city of about 20,000 south of Houston in Galveston County, raised the tax rate last week as part of a plan to stabilize its finances. Administrative turmoil led to a short-lived debt service payment default and a bond rating downgrade last month. The city's fiscal 2024 financial audit was posted Sept. 24 on the Municipal Securities Rulemaking Board's EMMA website, nearly a year after that fiscal year ended.

The western Texas city of Odessa, which began fiscal 2026 on Wednesday, posted its fiscal 2023 audit on EMMA last week. In 2024, Moody's Ratings and S&P Global Ratings withdrew the city's ratings due to a lack of sufficient and timely financial information.

 A statement from Odessa said the city was not notified a complaint had been filed and was not given an opportunity to respond to it. The city also said the law will apply to tax year 2026 and not retroactively to tax year 2025.

Whitesboro City Administrator Phil Harris said the city's tax hike is expected to raise $903,155 to pay for four additional firefighters and for capital improvements. 

"Our advisors were supportive of our position that the law is not retroactive and would not apply for our audit for the period ending Sept. 30, 2024, but that for our audit period ending Sept. 30, 2025," he said in an email.