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October 30, 2023
This article was co-authored by Lori Lato, Tax Partner at Calvetti Ferguson.
In the heartland of American enterprise, Texas has long maintained a reputation for nurturing business. Texas’ newly signed property tax package is a legislative milestone representing the most substantial property tax cut in the state’s history. Signed by Governor Greg Abbott in July, the legislation must pass a November vote to take effect in 2024.
The Texas property tax package, marked by bipartisan agreement and business support, is designed to provide tax relief to millions of Texans. Its key provisions include a significant increase in the homestead exemption from $40,000 to $100,000 and a permanent reduction in the school property tax rate. Additionally, a “circuit breaker” system will limit appraisal growth to 20% on non-homesteaded properties (residential and commercial) worth $5 million or less.
Between a nearly 11-cent reduction of the school property tax rate and a pilot project to limit appraisal growth to 20% on non-homesteaded properties, commercial real estate sectors have a lot to gain by the updated property tax legislation. It’s a lower tax bill plus protection over unexpected appraisal hikes.
Navigating the Nuances
All of this adds to the many benefits Texas businesses owners already have, boosting their already solid reputation as a business-friendly state. A corporate headquarters need not be located in Texas for a commercial property owner to benefit. A separate bill doubles the amount a Texas business must make before owing franchise tax, adding even more to the potential savings. And if you don’t owe franchise tax, you’ll no longer have to submit paperwork stating so.
The updated Texas property tax bill has been championed as a way to stimulate more investment in commercial spaces by small business owners. That said, as with anything new, there is uncertainty on the horizon. For example, the appraisal cap may incentivize complacency in property maintenance and investment, potentially leading to a stagnation in commercial property value growth.
Additionally, larger businesses will not benefit to the same degree since properties in the appraisal cap program must be $5 million and under, leading to unforeseen dynamics in the marketplace. There are also no provisions requiring landlords to pass their savings into renters, which may shift the dynamic between landlords and tenants.
Final Thoughts
The Texas property tax bill, though celebrated as a victory for homeowners and businesses, presents a mixed bag for commercial real estate. The cap on appraisal growth, although stabilizing for property owners, may bring unintended consequences. The boost to small business owners might invigorate certain sectors of the commercial market but could lead to disparities among different types of properties. Finally, the omission of provisions for renters may lead to shifts in commercial leasing trends and demands.
These impacts are emblematic of the multifaceted nature of tax legislation, demonstrating that even well-intentioned policies can have complex and nuanced effects on the market. The road ahead is one of opportunity, uncertainty, and adaptation, and the commercial real estate sector must navigate it with both caution and foresight.