Examining the effect of increasing Texas’ homestead exemption

A version of the following public comment was submitted to the Texas Senate Committee on Local Government on September 1, 2026.

Our research finds that the current approach toward increasing Texas’ homestead exemption is more likely to redistribute the cost of government than reduce it. Despite several increases in the property tax homestead exemption, total property tax levies have continued to rise. That is because durable property tax relief will require addressing the underlying growth in local government spending and debt.  

Why is relief needed? According to a report from the Texas Comptroller of Public Account’s office, home prices increased by about 40% between 2019 and 2023 alone. Though this appreciation has enriched long-time residents, it has also made them liable for higher taxes on paper gains they did not ask for, cannot easily access, and may never realize themselves, leaving those gains instead to their heirs. 

On the other hand, because there is no personal or traditional corporate income tax, local governments rely more heavily on property taxes to fund municipal services. According to the Tax Foundation, Texas ranks seventh in overall tax competitiveness but 38th in property tax competitiveness, with property taxes equal to about 1.4% of owner-occupied housing value. Property taxes make up 40% of local government revenues and that proportion continues to grow.  

Given these conditions, it is necessary to point out that tax cuts alone do not actually shrink the cost of government; they merely create pressure for spending reductions. If that pressure is not accompanied by spending restraint, tax relief may simply change who pays, when they pay, and which tax they pay. In both iterations of the homestead increase, Texas committed to “holding harmless” school districts and making up for losses in local school tax revenue with state funds. This means taxes were not actually reduced but merely shifted from one level of government to another. These costs will reappear, whether as higher state taxes, higher debts, or reduced reserves.  

Second, the repeated increases in the statewide homestead exemption apply exclusively to school districts, which account for only half of Texas’ property tax levy. The exemption does not apply to cities, counties, and special-purpose districts, which make up the other half. This explains why, despite recent efforts, total property tax levies in Texas have actually risen. According to recent data, total property tax levies in Fiscal Year 2025 increased by about $3 billion, or 3%. School district levies remained essentially flat, but levies by cities, counties, and special districts continued to increase. To provide effective property tax relief, Texas must look at the functioning of other local governments, not just school districts. 

Finally, there is the debt. Texas school districts carry a great deal of it, which presents a complex challenge to durable property tax relief. According to Reason Foundation’s national government finance report, in Fiscal Year 2024, Texas school districts carried, in aggregate, approximately $27,500 in bonded debt per student, while the national average was about $12,300. Bonds represent 82% of school districts’ debt in Texas.  

This massive debt acquisition occurred partly because Texas encourages school district debt. In 1983, voters approved the Permanent School Fund Bond Guarantee Program, which uses the state’s public education endowment to guarantee bonds issued by eligible school districts and charter schools. The guarantee gives eligible debt an AAA-backed credit, expanding the market for district bonds and lowering borrowing costs. The state has estimated that the program saves approximately $400 million in interest costs each year. Those savings are valuable, but making debt cheaper weakens market discipline and makes it easier for districts to borrow. That might lead to excessive borrowing, raising long-term costs and undermining the tax relief policymakers are trying to provide. 

For the current homestead reductions—and any future ones—to work as intended, we suggest three complementary reforms: 

Pair existing property tax limits with restrictions on local spending growth: Cutting taxes without lowering expenses will do no more than redistribute costs between different levels of government or between generations. Texas already limits how quickly many local governments can increase property tax revenues without voter approval. Policymakers should consider designing protections that also restrict spending growth.  

Extend property tax relief beyond school districts: School districts account for only about half of Texas property tax levies. If state policymakers wish to provide effective property tax relief, it should pursue comparable levy and spending restrictions for cities, counties, and special districts. 

Strengthen existing limits on school district debt eligible for the Permanent School Fund guarantee: Texas should consider strengthening the conditions under which school district debt qualifies for the state’s guarantee. The program already applies financial and debt-service tests, but policymakers should consider supplementing those protections with a clearer absolute ceiling based on enrollment, taxable property value, or some combination of these and other measures. It could also further distinguish among types of borrowing, reserving the guarantee for the highest-priority capital investments. Districts could still borrow outside those conditions, but those issuances would have to be backed by the district’s own credit. 

Texas has taken meaningful steps to reduce homeowners’ property tax bills. But effective property tax relief will require more than ever-larger exemptions. It will require controlling the growth of the governments those taxes finance. Otherwise, lower property taxes today will reappear in other taxes or larger debt costs tomorrow.

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Source: https://reason.org/testimony/examining-the-effect-of-increasing-texas-homestead-exemption/